The Department of the Treasury has kept a tight lid on information about its new Troubled Asset Relief Program plans; not even major banks have been briefed. Officials there say they won't begin to brief the financial press until after the Senate passes its version of the stimulus package; lawmakers will hear tonight from Treasury officials. The secrecy has effectively kept tension on a string of economic actors, from Congress, can't adjust its own response to the mortgage crisis without knowing what Treasury will do, to the markets, which have been bobbling.
TARP II is a tranche of about $350 billion designed to unlock the credit markets, help homeowners deal with mortgages and other debt, help and banks deal with toxic assets. The government has almost too many choices. Almost certainly, the Treasury wants to make sure that a large portion of the money it gives to banks will be quickly turned into loans and made available to the public. President Obama, in remarks today, said that the government will "set up a whole new mechanism to help people get consumer credit," and help small and medium sized businesses get credit. "We're going to make sure a lot of that money is going directly to the consumers," he said.
For homeowners - and here, we're talking about primary homes -- the government has at least three options: they can assume the mortgage debt themselves (won't happen), standardize loan modifications (probably will happen through Fannie and Freddie), and force the owners of mortgages to either submit to a third party's terms on what they should be, or work out the terms with the owners of the mortgages themselves.
There have been hints that TARP II will provide government resources to citizens with other types of debt, like outstanding student loans. Treasury officials declined to comment.
The Obama Administration has a unique public relations challenge, and, natch, it involves what'll be the most controversial (and potentially most effective) use of its money.They don't want the public, or the market, to think about the entity that will purchase or assume distressed assets as a "bad bank." They'll be lucky if people adopt the technical term - "aggregator." Instead, according to an administration official, an active, asset-purchasing "public-private partnership" will be set up in lieu of a simple government guarantee on the assets themselves. The Wall Street Journal reports today that the seed money will come from TARP. The big question: how does the government get banks and hedge funds to buy in? What incentives can they offer? Ostensibly, if the banks and funds believed that they were going to profit from contributing capital in the long-term, they might be amenable. But these entities are short of cash as it is, and what cash they have they're either hoarding or paying it out. They're risk averse and not thinking long-term. TARP I demonstrated the government's incapacity to effectively value assets, leaving taxpayers on the hook for the difference between market value and what the government had to pay. Banks had no incentive to sell anything to the government for less than what the government paid another bank.
Presumably, Sec. Geithner knows all of this. According to the Journal, the government's "working theory for the government/private-sector partnership is that investors wouldn't overpay, because if they did, they'd stand to lose money; but they also wouldn't underpay, since the selling banks wouldn't be willing to part with their assets too cheaply."
Banks might buy into the aggregator concept because it gets at the core problem they face, which is balance sheet clean up. The theory is that once you clean up a bank's balance sheet, you'd improve the transparency of the assets of financial institutions and thereby reduce uncertainty in the market and - crucially -- help attract private capital back into the financial system. Getting rid of bad assets also allows managers to focus on running their profitable businesses and not worrying about their toxic assets.
As far as hedge funds co-investing with the government in the aggregator, there is potential for a lot of profit. Distressed assets can be purchased a good prices and risk mitigated by the government's involvement. Government is a good partner because of the resources it can bring to bear on problems it wants to see fixed and because private investors may benefit from guarantees that limit their downside exposure.
Clues and eyewinks coming from the administration suggest that a primary goal won't be recapitalization. Why? Because the money is being lost at a much greater rate than the government can shovel it in. That was a problem with TARP I, and the Obama administration appears to have learned from it.
This article available online at:
http://www.theatlantic.com/politics/archive/2009/02/the-world-braces-for-tarp-ii/463/
