The US government on Tuesday abandoned its plan to buy toxic assets, in what the FT called “a stunning reversal” by Treasury Secretary Hank Paulson.
Here’s what some commentators say about it:
Yves Smith at NakedCapitalism asks whether the switch of the TARP away from troubled assets will create more hedge fund forced sales. With hedge funds deleveraging, distress in one market leads to margin calls, which can lead hedge funds to sell not the asset subject to the margin call but one that is less impaired, possibly in a completely different market. Hod on for a wild ride in the markets, she warns.
There are two main takes on the wrong turn in TARP, says Jeff Miller at SeekingAlpha. The Market Take: rightly or wrongly, market participants now see the programme as a funding source for anyone who claims a need, and most importantly, interpret the failure to purchase distressed securities as proof that these holdings are worthless. The Political Take, meanwhile, sees the decision to invest in preferred stock instead of troubled assets as an easy course which also sounds good to taxpayers. However, says Miller, the investment and political types should opt for some clear-headed public policy analysis. The best hope for investors is that the new Obama administration will quickly develop and announce proposals that get to the root of problems.
Paulson wants the private sector to give him a helping hand with his bailouts and Felix Salmon at Portfolio.com thinks it’s a good idea,
…especially in a world where even Las Vegas Sands can attract new equity capital, and where Barclays shareholders are in revolt because they feel they’re being prevented from putting in new money. Clearly, there’s money out there to be invested, and Treasury should take advantage of that fact.
Salmon adds, however, that there might be something else going on here, for the conspiracy-minded.
Paulson’s already given out hundreds of billions of dollars of Tarp money to his Wall Street buddies at bargain-basement rates. If he doesn’t want similar bargains to be extended to smelly people like General Motors, then one way of ensuring that would be to insist on private-sector matching funds.
As Paulson tries to figure out the TARP’s true purpose in life, he is overlooking a key problem, says David Reilly in the WSJ’s Heard on the Street column: the rescue of Fannie Mae and Freddie Mac. By their unwillness to directly address debt investors’ concerns and drive down mortgage rates, Paulson and Treasury’s decision to guarantee bank debt for three years could make matters worse. That backing is more clear-cut than the support for Fannie and Freddie and could soak up investor demand, he warns. Without calling for full nationalisation of the GSEs, Reilly suggests Treasury mimic a programme it set up to backstop other markets by borrowing money to put into a special-purpose vehicle, which would then lend to Fannie and Freddie. That would help bring mortgage rates down closer to government borrowing costs.
It’s easy to call it a flip-flop, says Andrew Ross Sorkin at DealBook, but Paulson deserves some credit for being willing to admit he made a mistake and change course.
Remember what John Maynard Keynes, the British economist, famously said when he was accused of flip-flopping on his views about government intervention in the markets during the Great Depression: “When the facts change, I change my mind. What do you do, sir?”
Most politicians would have gripped tightly to their original plan for fear that acknowledging failure would be even worse.
Paulson should have realised earlier that his original Tarp concept was a flawed idea, says Richard Beales at BreakingViews. The final Tarp law allowed him to invest directly in banks too, which is now his preferred approach. At least he has seen sense, although it does raise several questions about the Tarp programme, including its size. It also underlines how Paulson and his colleagues, along with president-elect Obama’s financial team, still need to do a better job explaining their rationale when they dispense taxpayers’ money.
The bailout of the US financial system isn’t working, says David Leinweber on O’Reilly Radar.
The government’s rescue plan has fundamental flaws, including incentives that favour the failed firms, not the country as a whole. New ideas are needed…
Don’t prop up existing banks, take part of the $700bn earmarked for the bailout, and capitalise a new financial system. “Sounds crazy at first. But this crisis requires bold, even drastic, action.