Tuesday, September 30, 2008

TARPaulining All Over

I think they got the name wrong in the first place, that's why it did not get passed. TARP or Troubled Asset Relief Program, it sounded like tarpaulin, the heavy duty netting for lifting heavy goods onto the ships ... no wonder la, the safety net has too many gaping holes in them.

1) Seriously, this will bring back a tighter plan, one that is more accountable and responsible - so, gotta be good right.

2) The original plan did not specify at what price levels will the fund buy the distressed assets at. If they are buying at market, its no use to the banks and financials because it does not add to their capital base. Its the capital that needs to be enlarged. Hence they have to buy at higher than market prices for the whole thing to make sense, or don't buy the assets but give insurance for the assets as a major comfort factor.

3) The biggest obstacle has to be that the naysayers do not want the fund to buy these assets.

4) The release in batches is good to maintain a sense of integrity to the whole process. Shows that the team is managing the lending/injection well before given new parcels of fund. $250bn first, then another $100bn if results are positive. Plus the government will have the option to block the remaining $350m. This will send the message of more accountability at all levels.

5) The other message to the markets is that the US government will NOT just roll over in any future financial crisis. The major financial firms will now know that they cannot simply knock on the doors of Fed or Treasury to help them get rid of the mess they may create in the future. That is very clear.

6) There probably will be structured equity exposure to companies that take money from the fund as the fund is likely to be paying higher than market prices for the assets.

7) The mark to market accounting may be the pink elephant in the room. The rule may be suspended for the time being so that financials which sell those assets may not need to write down the full amount, which would have reduced their capital availability. The rule may be suspended till 2010 (when the fund expires) but only for those instruments affected and taken up by the fund. This seemingly inane accounting move actually may lift the gloom and difficulty of rescuing the affected companies brilliantly by just the stroke of an accounting entry.

All in, its actually not that bad that the bailout fund was voted down, although I did not expect that at all. A tighter second plan will send the right message and drill down on proper and responsible restructuring plans and ramifications. The fact that major equity markets may have lost 5%-8% may actually be good. When the second plan is approved, regaining just 3%-4% of what was lost may then be a big sigh of relief.
Still, its a very long road for equities in general. Not yet to get back in.

p/s photos: Mami Yamasaki


Butt said...

The US is now getting a taste of their own medicine....bail outs were once condemned by them. However I do agree that there's circumstances which warrant bail outs but it must be done in a right manner and should not condone the wrong doers and let them off the hook. The investors must take the hit on the risks they take (though manny laymen may not have a clue what or how big is the risks they are taking).

There'll be a bail out eventually just in what form.....

see said...

Won't it be too late or situation will get worse by the time they come back with another plan? I mean companies like GE are drawing down their credit lines even don't need it now in case it gets tougher to get working capital with all the banks getting into trouble. Healthy companies may be tipped over with the credit crunch. This whole thing looks more like confidence crisis & looks like Wall Street is holding the rest of tax payers for ransom....give bailout money or else....tough choice for main street

Butt said...

Article from TIME.

The Administration and Congress have felt compelled to do something about the "financial meltdown," so an inefficient and inequitable "bailout plan" has been rushed through the legislature despite harsh criticism from the right and left. That's unfortunate. Both presidential candidates were stalling by qualifying the plan. Whichever candidate had had the courage to reject outright this proposal would have had the better claim to be President.

The Bailout Bill That Nobody Likes
More Related
7 Questions About the $700 Billion Bailout
Washington Prepares the Mother of All Bailouts
Nicaraguans Fight Over Who Owns a Powerful Hat
Do not be fooled. The $700 billion (ultimately $1 trillion or more) bailout is not predominantly for mortgages and homeowners. Instead, the bailout is for mortgage-backed securities. In fact, some versions of these instruments are imaginary derivatives. These claims overlap on the same types of mortgages. Many financial institutions wrote claims over the same mortgages, and these are the majority of claims that have "gone bad."

At this point, such claims have no bearing on the mortgage or housing crisis; they have bearing only on the holders of these securities themselves. These are ridiculously risky claims with little value for society. It is as if many financial institutions sold "earthquake insurance" on the same house: when the quake hits, all these claims become close to worthless — but the claims are simply bets disconnected from reality.

Follow the money. Average Joes and Janes are not the holders of the other side of complicated, over-the-counter derivatives contracts. Rather, hedge funds are the main holders. The bailout will involve a transfer of wealth — from the American people to financial institutions engaging in reckless speculation — that will be the greatest in history.

Rescuing financial institutions is not the best solution. Yes, banks are needed to provide capital to businesses. But it is not necessary to spend $1 trillion to maintain liquidity. If the government is to intervene, it should pick and choose which claims to purchase; claims that are directly tied to mortgages would be a good start.

Let financial institutions fail, merge or be bought out. The faltering institutions will see their shares devalued and will be likely to be taken over by stronger institutions — as has already started happening. This consolidation of the financial sector is both efficient and inevitable; government action can only delay the adjustment.

The government should not intervene. It should leave overleveraged financial institutions to default on their derivatives obligations and, if necessary, file for bankruptcy. Much of the crisis has arisen from miscalculating the risks involved in a large book of positions in these derivatives. It is only logical that these institutions pay for their poor management.

Rather than bailing out Wall Street, we propose that the government should buy up the actual mortgages in question and do nothing else. The government should not touch any derivatives; that is, claims that do not directly tie into the actual mortgages. If money becomes too tight, then the Fed can certainly increase its loans to financial institutions.

Let the poorly managed, overly risk-taking financial institutions fail! Always remember that Wall Street and the real economy are not the same thing.

Why Capital Gains Tax Should Not Be Implemented

I have to reiterate why a Capital Gains Tax is a very bad idea for Malaysia. Unique traits of Malaysia: a) Very open economy b) Ringg...