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Did We Really Waste $78 Billion on TARP?

According to a Congressional oversight panel, the TARP program "wasted" $78 billion by overpaying for assets. It makes a good story -- AP can report it as the Bush administration overpaying Wall Street, while Fox can use it as proof that the government doesn't know what they're doing. Perfectly suited for both outlets. But is it true?

That's a little less clear.

Let's remember the original purpose of the Troubled Asset Relief Program. The problem, as I discussed back in October, is primarily that underneath all the covers, hedges, credit default swaps, and securitized mortgage portfolios, there are a whole lot of mortgages on a whole lot of properties that no one knows quite how to value. They can be certain the assets are worth something -- but it might be 25 percent or it might be 95 percent of the book value.

If you don't know how to value an asset, you have to look at the price you could sell it at now. That price is driven down by perceived risk. I haven't seen a real fire sale in years, but this is where the term "fire sale" came from: after a fire, a company needed to sell off inventory, and some of it might be smoky or water-damaged, so they sold it at a low price to get it out. Forced sales push the price down.

Right now, panic -- and President Obama's talk of impending "catastrophe" isn't helping -- is making everyone perceive really big risks, while companies that are selling these assets are pricing them at fire sale prices to get them to move. There are mathematical means of turning your subjective evaluations into a price you're willing to pay, but in this situation, it's always going to mean prices will end up at the lower end of the range.

The problem is that since FASB 157 (the "mark to market" rule) went into effect, once an asset is sold at a fire sale price, everyone else must mark the asset down to the fire sale price. That triggers a lot of bad things, and the net effect of those bad things is to make a bank apparently insolvent.

So along comes the TARP. There was a lot of debate on how exactly the TARP should work, and frankly we're not clear yet how it really was exercised; there's plenty of room to criticize, and once we have better information I'm sure there will be a lot of evaluation with hindsight.

There's one thing of which we can be certain: if TARP was going to work, it must buy assets at more than their market value. We know that because if TARP bought the assets at just what the market would yield at the time, it would have no effect. If the assets would sell today at 25¢ on the dollar, and a bank was insolvent valuing those assets at 25¢ on the dollar, then buying them doesn't make the bank any less insolvent. The whole point of TARP was to make the Treasury the "buyer of last resort," in order to pick up "toxic assets" and improve the balance sheets of the banks that held them.

But that was ancient history in the modern news world, it's months ago, and who remembers from back then? Still, it's bad enough that you can't expect the legacy media to understand technology issues or report them correctly, but you would hope that business reporters would understand business. Somehow, the urge to report crises, catastrophes, and impending doom overwhelms the desire to think.