House votes down TARP in current form

The administration’s “troubled asset relief program” did not pass the House
of
Representatives. Although the plan was voted down we think it likely that,
rather
than concede defeat, this simply will bring the parties back to the floor
for another
vote or back to the drawing board for adjustments needed to sway the small
number of votes required for passage. We continue to anticipate some form
of
government rescue package will be agreed upon at in the near future.

Next step may be Fed action, not Congress
Fed Chairman Bernanke, in recent testimony before Congress, noted that the
outcome of failure for the TARP was a recession, and possibly a deep one.
As
such, it is possible that the next move may come from the Fed, in the form
of a
rate cut, rather than a more exotic program. Such a move would not come as
a
surprise to the market as the futures are pricing this in already, and
given that the
next FOMC meeting is a long way off on October 29, there may be a
temptation to
do so earlier than later.

Future credit strains likely
As it stands now, the tightening of credit conditions could put severe
strains on
the economy and cause default rates to rise. Our estimates already suggest
that
delinquency rates on a wide swath of consumer and corporate loans could
almost
double, to levels not seen since the early 1990s, and threaten to load even
more
nonperforming loans onto bank’s already burdened balance sheets. Without
some
way to lower the amount on non-performing assets on bank balance sheets,
the
outlook for credit creation, and the economy, is quite dim.