Criticism of the Tarp/MOAB/Hanke Panke continued apace on Monday morning, as equity markets tumbled and the freeze in credit markets declined to thaw.
Here’s a pithy take on the bailout - dubbed “Tarpalling: 10 things wrong with the Tarp” - by Paul Mortimer-Lee, chief economist at BNP Paribas in London.
1. Participation is voluntary. As with the 1992 Cooperative Credit Purchasing Corporation in Japan, some potential participants may not offer assets for fear of having to crystallise losses. Side conditions such as the restrictions on executive pay may reduce participation further.
2. Despite its gargantuan size and massive grant of powers to the Treasury Secretary, it has failed to convince the markets it will break the back of the crisis.
3. The mechanism to set prices remainsobscure. If auctions are restricted to single assets then there may be very few bids because there are very few holders (one or two in some cases). If heterogeneous assets are included in the same auction then setting a price becomes very difficult.
4. If the Treasury pays market prices, what’s the point of participating? If it pays nearer to ‘hold to maturity prices’ then it makes a gift of capital to the seller and risks a taxpayer revolt that will impeded the implementation of more worthwhile measures.
5. There is no clear idea how the cut off price will be calculated or what proportion of offers will be accepted and other aspects of the pricing mechanism.
6. The capital a firm receives will be in proportion to its holdings of toxic assets. The more reckless and foolish it’s been the bigger the capital injection.
7. Capital will be injected to firms who may not need it and to those who may not survive in any case. This is poor value for money indeed.
8. There is no matching requirement for shareholders to inject capital or to suspend dividends to match the capital put in by the public sector. Warrants are a poor substitute.
9. The plan does not tackle the fundamental source of the bad loans afflicting the system – falling house prices and an excessive debt burden being faced by US households.
10. The name. This is a mechanism that relies on reverse auctions, so someone should have been more careful about what it spells and means written backwards. A short consultation of the Oxford English Dictionary reveals several meanings of the word PRAT. The first listed is, “a trick; a piece of trickery or fraud; a prank”. ‘Nuff said.
