Let’s hear it for the acronyms, especially now that we’ve graduated to four letters; Forget CDS, CDO and SIV – it’s time to talk TARP.
Yes folks, it’s the Troubled Asset Relief Program, or as we like to say here on FT Alphaville, the Mother of All Bail-outs.
Here’s a quick crib to the MOAB:
What?: According to Bank of America, the goal of the program “is to preclude or at least postpone systematic failures in financial institutions.” The Treasury’s description is slightly more long-winded: “This program is intended to fundamentally and comprehensively address the root cause of our financial system’s stresses by removing distressed assets from the financial system”
Come again?: The US Treasury, through this MOAB, will buy up to $700bn in assets, financed by an equivalent issuance of government bonds and defined as “residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages”. Hank P also reserves the right, in consultation with Ben B, “to purchase other assets, as deemed necessary to effectively stabilize financial markets.”
How?: The MOAB will probably purchase assets through reverse auction, although this has not yet been decided. Management of these assets will be outsourced to the private sector (BlackRock anyone?). The Treasury may sell the assets at its discretion or may hold assets to maturity.
Who?: Companies eligible to tap the program include but are not limited to banks, brokers-dealers and insurers with “significant” operations in the US.
Timing?: The program will, if approved by Congress, run through September 2010, although it will only accept assets originated or issued on or before 17 September 2008
Who’s eligible?: Any institution including, but not limited to, banks, thrifts, credit unions, broker-dealers, and insurance companies having significant operations in the US. and, if Hank P and Ben B agree, any other institution he deemed necessary to promote financial market stability.
Quis custodiet ipsos custodes?: Within three months of the first asset purchases, and semi-annually thereafter, the Treasury will provide the appropriate Congressional committees with regular updates on the program. BUT – “Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”
What about the taxpayers?: “Cash received from liquidating the assets, including any additional returns, will be returned to Treasury’s general fund for the benefit of American taxpayers,” according to the fact sheet.
What’s the word on the Street?: Generally pleased.
RBS:
Our initial take is that the banks which have taken the more brutal marks on eligible and associated assets (and raised equity as a result) may benefit more from the line in the sand; those banks/insurers which have professed “no need to write down assets as they have no intention of selling and that they will be OK in the end” may not be so lucky and will now have a benchmark against which they should price. Of course, there is still the possibility that auditors may be convinced by their original argument; and we are also hearing of a move to suspend temporarily certain mark-to-market accounting. There is much debate left as to which will be winners and losers, and we will need to see how this pans out.
Obviously, there is still much to pin down here and it is painfully obvious that Paulson has left loopholes big enough to drive a bus through in order to leave his room for manoeuvre considerable. One thing we would caution against is expecting too many European banks to have access directly or indirectly and would thus be cautious about a rally overshoot. Play it close to home.
UniCredit:
We expect the markets reaction to the proposal to be positive, this is a broad-ranging and convincing plan to address the daunting problems in the financial sector and support the housing market. As such, it significantly improves the odds for a gradual stabilization and economic recovery ahead. Volatility will remain high, however, and equity sell-offs will occur again as we get renewed bouts of concern on the plan’s implementation risks and on the already fragile global economic outlook. The USD will likely come under more pressure out of concern for the envisaged increase in public debt, but we remain of the view that the positive impact on the US macro and financial outlook will dominate, supporting a moderate USD strengthening over the next 15 months.
The plan will be open to US institutions as well as to foreign financial institutions with substantial operations in the US. This is hugely significant and will be politically controversial, as it implies putting US taxpayers’ money at stake to rescue foreign banks. Paulson however stressed that where a financial institution has a significant presence in the US, its problems affect the US consumer and the US to the same degree, regardless of whether it is a US or a foreign institution. The argument makes perfect sense, but it will probably make for a more heated discussion in Congress.
BNP Paribas:
While the plan is clearly a ‘good thing’ in terms of trying to achieve financial stability, this is not a cure all for the financial ills of the US. Probably, and hopefully, it will not amount to a helicopter-like dropping of ‘get out of jail’ cards to those firms that have taken the most toxic waste onto their balance sheets. It injects capital into the system by providing a home to carry toxic debt and therefore relieve a vicious circle in the private sector of forced sales, capital losses, reduced access to liquidity and more forced sales,. However, if assets are taken on board at a fair/market value it should not amount to a capital injection to the firms themselves
And the bloggers?: Not quite so pleased.
Let’s leave no room for ambiguity here. The Treasury’s draft plan for saving the world is breathtakingly awful. It would give the Secretary of the Treasury entirely unchecked discretion over up to 700B dollars. Even that “limit” has a loophole big enough that you could drive a truck through it, so the Secretary could in effect spend up to 1.8T dollars, right up to the newly raised Federal debt ceiling, without further Congressional action. This act would be such a wholesale delegation of the power of the purse that I wonder whether it is even constitutional. Of course, the act explicitly puts the Secretary’s actions beyond any judicial review, so perhaps questions of legality or constitutionality are merely academic.
This is a financial coup d’etat, with the only limitation the $700 billion balance sheet figure. The measure already gives the Treasury the authority not simply to buy dud mortgage paper but other assets as it deems fit. There is no accountability beyond a report (contents undefined) to Congress three months into the program and semiannually thereafter. The Treasury could via incompetence or venality grossly overpay for assets and advisory services, and fail to exclude consultants with conflicts of interest, and there would be no recourse. Given the truly appalling track record of this Administration in its outsourcing, this is not an idle worry.
Related links:
Text of draft proposal for bailout plan – via National Association of Federal Credit Unions