Son of TARP

[This comment appears in Wednesday's FT.]

The Obama administration knows that the politics of its new Financial Stability Plan is even more difficult than the economics--which is saying something. The country detests the Troubled Asset Relief Programme, now recast and renamed, regarding it as a vastly expensive rescue of the people who caused the crisis. Tim Geithner acknowledged this on Tuesday. The administration had to improve and expand the programme, while persuading voters that costs will be controlled and that the villains will be punished. The goals are complicated, and the result is a bit of a mess.

The caps on pay of banking executives announced earlier, though far milder than taxpayers have been led to think, are part of the strategy. The new plan, which will use Treasury money to seed new commitments from the private sector and the Federal Reserve, also has politics much in mind. Some $350bn remains unspent in the TARP. The idea is to use it to mobilise new Fed lending and private participation in the resolution of toxic assets. This way the $350bn might be stretched to $2,000bn and up with no need for new Congressional approval.

The plan is anything but finished. Mr Geithner announced principles that will guide it, nothing resembling  a worked-out scheme.

The Fed side is reasonably straightforward. It involves expanding an existing programme, the Term Asset-backed Securities Loan Facility, which lends to investors in securitised car, student and credit-card loans. The scope of the TALF will be widened. The Treasury will put some more money in, shielding the Fed from the first layer of risk. Whether this will be enough to protect the Fed's balance sheet remains to be seen.

The other main innovation is the plan to create a public-private fund to acquire bad assets. This raises many more questions than the expanded TALF. What terms and conditions will the Treasury offer its private partners in the venture? There are plenty of bad assets out there already for investors willing to buy them. The new inducement seems to be guarantees. The Treasury can stretch the TARP money a long way by guaranteeing the bad assets: this could certainly draw in lots of new private capital. It would also leave taxpayers on the hook for potentially very large sums if things do not work out as intended.

Mr Geithner did not go into that, or explain how taxpayers would participate in the upside if things go well. Despite the insistence on transparency, one wonders if investors will be offered a better deal than taxpayers will be led to think. More forthright approaches--including nationalisation--might end up costing taxpayers less, but the administration has apparently decided that they would be much harder to sell. And Mr Geithner's assurance that his scheme will "help provide a market mechanism for valuing assets" is puzzling. The terms of the guarantees or subsidies attached to the toxic assets will decide what they are worth--and what this new plan, once it has been worked out, is really going to cost.