TARP in Trouble

Our Salesman-in-Chief is pushing this latest bailout plan hard, but Congressional leaders may not be able to bring along the rank-and-file, who are getting bombarded with messages of outrage from constituents. With the general election just five weeks away, congressmen running for re-election are going to have a hard time ignoring those messages. Voters have short memories, but not that short.

The proposed "Emergency Economic Stabilization Act of 2008" will require an initial outlay of $250 billion (with another $100 billion at the President's immediate disposal) to fund a Troubled Asset Relief Program (TARP). Once the Treasury Secretary burns through that, he has access to another $350 billion unless Congress votes to withhold it. TARP funds will be used to buy impaired securities for future resale, hopefully at higher prices. Only when TARP has sold all its inventory will taxpayers know the true cost of the program.

It's not like Congress actually has the money. One provision of the new bill is to raise the Statutory Limit on the Public Debt (the so-called debt ceiling) to $11.315 trillion. This will make it legal for us to borrow and spend even more. And it's not like the $700 billion of borrowed money is going to be enough, either, with tens of trillions of dollars worth of illiquid assets looking for a home. So what's the point?

According to erstwhile presidential candidate Ron Paul, the mission is "to prevent the liquidation of bad debt and worthless assets at market prices, and instead [to] try to prop up those markets and keep those assets trading at prices far in excess of what any buyer would be willing to pay." In other words, government will be in the price-fixing business, last attempted with little success during the Nixon Administration. Distressed securities for which there are no bids will be marked to maturity. (I call it marked-to-mandate.) Recent regulations requiring mark-to-market accounting by investment firms may be rolled back: "The Securities and Exchange Commission shall have the authority under the securities laws...to suspend, by rule, regulation, or order, the application of Statement Number 157 of the Financial Accounting Standards Board."

Recalcitrant lawmakers on Capitol Hill have formed a "Skeptics Caucus" out of concern that the government will overpay for troubled assets. Convening the caucus a week ago, Rep. Brad Sherman (D-Calif.) proclaimed, “this is greatest shift of power to the imperial presidency and the greatest shift of wealth to a still wealthy Wall Street that anyone could imagine.” The Skeptics cannot be reassured by the present bill, which leaves it to Treasury Secretary Hank Paulson to develop TARP guidelines, including "methods for pricing and valuing troubled assets" and "criteria for identifying troubled assets for purchase." The Secretary is furthermore authorized to make "direct purchases" of assets where "use of a market mechanism...is not feasible or appropriate."

The Secretary's new job, thus, is to create a market where none exists and a price structure that fortifies financial-sector balance sheets under severe pressure since marking to Merrill. And he needs to broadcast the results with all the gusto of a carnival barker. "To facilitate market transparency," the bill reads, "the Secretary shall make available to the public, in electronic form, a description, amounts, and pricing of assets acquired under this Act, within 2 business days of purchase, trade, or other disposition." The goal is to alter perception in the marketplace, to entice private bidders back into the pool.

If private capital remains on the sidelines, the Paulson Plan will go up in smoke.