Wednesday, November 12, 2008

Treasury Changes Plan: Will Not Use TARP to Buy Mortgages

Hank Paulson has announced a drastic change to the original architecture of the TARP.  The Treasury no longer plans to purchase distressed mortgage debt from banks, but will instead focus on relieving pressures on consumer credit.  The Treasury is exploring a new facility for purchasing asset-backed securities.  Mr. Paulson also stated that companies accepting new taxpayer funding may be required to get matching private capital.  My original reaction to this news is positive.  I hated the idea of buying crappy assets at inflated prices from banks that had made terrible investment decisions.  I like the idea of providing stimulus to industries and consumers that are suffering directly, rather than granting a bailout to the jokers that got us in this mess to begin with.  However, this news is really bad for all the banks, insurers, etc that were hoping to unload their illiquid assets to the Fed.  The market is not happy with the news, but for the taxpayer, this is potentially positive.


Anonymous said...

Is this another sign we are drifting into a deflationary environment? I mean, USO is down to almost rediculous levels, Housing is dropping like a rock, Companies are slashing employment like the ripper himself.

K10 said...

Probably. I think it is one part deflation, one part liquidations by hedge funds, pension funds etc. The fact that all assets are dropping simultaneously indicates to me that investors are selling everything to raise cash because they are worried about deflation, terrified of more losses, or simply being forced to sell to deleverage. The only safe place to hide is cash.