Henry Paulson Takes Down the TARP: Sort Of
Remember way back in October when all right-minded people supported Treasury Secretary Henry Paulson's bank bailout package, which went under the name of Troubled Assets Relief Program (TARP)? Those of us who thought it was poorly designed as a mechanism to help the financial system, and was likely to lead to taxpayer enrichment of the extremely rich, were denounced as knuckle-scraping Neanderthals.
Of course Paulson changed course a week after he got his bailout bill and decided that the best route was to directly inject capital into the banks, as advocated by the knuckle-scraping Neanderthals. Last week the knuckle-scraping Neanderthals could claim a second victory as he announced that the TARP program was officially dead, RIP.
But in Washington, no bad idea stays dead for long.
Paulson also announced plans for a son of TARP program. Under this program, Paulson would buy up securities that are backed up by car loans, student loans, credit card debt and other forms of consumer borrowing. The rationale is the same as was given for TARP; the market for these assets has collapsed as a result of soaring default rates. Ostensibly, this collapse lies behind the falloff in consumer lending and the plunging consumption of the last few months.
There is even less reason for the government to get in the bad consumer debt business than the bad mortgage business. Consumer lending has plummeted for two reasons. First consumers are much less creditworthy today than they were a year ago. Tens of millions of homeowners who had substantial equity in their homes a year ago have little or no equity today.
A person with $100,000 in home equity will not default on a car loan or credit card debt. A person with zero home equity, and no other financial wealth, is a serious default risk. It's no surprise that financial companies are much less willing to lend to consumers in the current economic environment.
The other reason that borrowing is down is that homeowners realize that they have to start saving. Tens of millions of homeowners are approaching retirement with no pension, no savings and no equity in their home. Is it any surprise that these people would suddenly place a priority on saving?
Paulson's plan will not revive consumer spending and provide any noticeable boost to the economy. It is simply another way to give money to the financial industry, as Treasury will presumably overpay to acquire tens of billions of dollars of securities backed by consumer debt. It's a good deal for the financial sector, but it's a ripoff for the rest of us.
I like Bill Mahers plan, drop the 700 billion from a plane, and let us all fight over it. It would be a heck of a lot more equitable, and likely would do a lot more good.
The banks were supposed to use the money to loan to consumers, instead they are hoarding it. The dickwads in charge should be stripped of their assets and tarred and feathered and dropped in watts or some suburban enclave in Florida.
The first principle of the bailout should have been to fire every board and CEO of the troubled banks and prevent them from ever serving in a similar capacity ANYWHERE.
Incompetence shouldn't be rewarded.
November 16, 2008 10:25 AM | Reply | Permalink
the problem with that is we would have to fire half of Congress too, and they know it. This is a colossal failure of leadership, and we will be paying the price for years.
November 16, 2008 10:33 AM | Reply | Permalink
Im up for that. They are generally useless anyway.
November 16, 2008 5:59 PM | Reply | Permalink
Speaking of doing a lot more good, how about letting behemoth-producing car manufacturers go bottom up (maybe inducing them to do some restructuring?) while at the same time increasing the amounts of unemployment benefits and the length of time they're in effect for those thrown out of work as a result.
Sort of like that stimulus package thing - those who supported that peculiarity can hardly be against more cash in auto-workers' pockets. Didn't I read somewhere that consumer spending makes up 70% of our economy?
November 16, 2008 11:22 AM | Reply | Permalink
Yeah, maybe big oil ought to bail out the big 3
November 16, 2008 5:39 PM | Reply | Permalink
Thanks.
I was thinking of claiming that these "mistakes" show how much we need some with the intelligence of e.g.Larry Summers instead of Paulson. But it's hard for me to believe that Paulson isn't smart enough. He couldn't have reached the top of Goldman if that were true.
This is really a terrible indictment but I believe Paulson is deploying enormous amounts of money - and I'll phrase this carefully- in a way that he knows is not optimal.
Certainly he is benefitting the sector from which he came and that's one possible explanation. But one I prefer not to make without real evidence.
A less inflammatory one is idealogy. That in all sincerity he is convinced that some of the alternative uses such more direct involvement in the housing market, even if more effective in this crisis, would undermine the "Free Market". That comes close to returning to the charge of intellectual inadequacy.
I'm reminded of the expression "fool or knave". So if he's not a fool.......
November 16, 2008 10:47 AM | Reply | Permalink
Topping the list of fools and knaves are the spineless and idea-less Democrats in Congress who fell all over themselves to approve this $700 billion bailout DESPITE REPUBLICAN OPPOSITION. Obama was floating along in that mindless stream. He is a smart and well-meaning guy, but his supporters need to cease their "tearing up" over his pigmentation and appeal to his intelligence instead. Enough of this obsession with giveaways to the greedy, the foolish and the whiners. Let Detroit DIE! and with good riddance. We can buy better cars (and trains) from abroad, and have been doing so for years. Protect SAVERS and DEPOSITORS from foolish bankers not vice versa.
November 16, 2008 11:08 AM | Reply | Permalink
I think the crisis is real and $700 bn would be a justified expenditure . My question is whether it is being well spent.
I've blogged elsewhere on Detroit and that's off the thread so I won't repeat here.
November 16, 2008 11:14 AM | Reply | Permalink
"Do You Know the Way to TARP-Jose?"
Don't forget municipal/state bailout requests. San Jose wants 14 billionfrom TARP its mayor says.
Only 4 times its annual operating budget?
The Treasury is going to need to get some emergency procurements to add to its helicopter fleet...
As AIG demonstrates so vividly, create a delivery mechanism like the TARP and the thing soon jams in the "full open" position as recipients discover their original accounting was in error.
We are headed for a longterm government occupation of the financial sector and maybe the commercial sector as well.
No one here may have heard of the BDI and I don't want the alarmists to start shrieking, but what will our government do if the shipping starts seizing up? Will we get into the business of extending guarantees on LOC's? (for commentary on this additional black cloud, go to LondonBanker and read "Systemic Risk..")
Where is this all heading?
November 16, 2008 11:14 AM | Reply | Permalink
Someone explain again why we are giving money to AIG...
November 16, 2008 12:25 PM | Reply | Permalink
Because we don't have the collective guts to give it to ordinary people who need it.
November 16, 2008 12:56 PM | Reply | Permalink
"The other reason that borrowing is down is that homeowners realize that they have to start saving. Tens of millions of homeowners are approaching retirement with no pension, no savings and no equity in their home."
Pleeeeeeease, Americans are totally addicted to consuming. The reason borrowing is down, (except credit card debt which is way up), is because they can't. They are tapped out, not because they are saving money. When a new technology arrives that creates lots of jobs, (production), and people get jobs and wages rise, then and only then will people begin to be able to qualify for loans again. Until that time it's going to be a very long DEPRESSION.
November 16, 2008 1:07 PM | Reply | Permalink
Dean, we've watched the painful drama of Treasury attempting to turn things around by throwing money at one institution after another. Are we finally ready to talk about restoring stability by helping ordinary people fix their balance sheets?
It's time to pay some people to stay in their houses. The feds should start in the hardest hit neighborhoods, find the people who are deepest underwater on their mortgages, and offer to share their payment by however much housing values have deteriorated in the neighborhood. For example, if you paid 300,000 for your house and it's only worth 150k today, the share would be half.
People would have to pay taxes on the benefit and meet a variety of other social (not financial) conditions. If you move out, you lose the benefit. If you're convicted of a crime, you lose the benefit. If you don't maintain your property, you lose the benefit. When you finally sell the house, you share part of the proceeds with the feds.
My idea is that the govt would stop sharing the payments when what is owed on the house matches up with the value, but the part of the proceeds that would need to be paid back upon sale shrinks over time. This would encourage people to stay in their houses for a long time.
A benefit here is that there are no costs to refinance the loan because it's left in place, and the "bad" mortgage securities are shored up because the loans are being paid off. It's a "side deal" that the homeowner would make with the feds, so there's no need to cancel pre-existing contracts.
I know you really like your Own to Rent program but I think it will not fly because home ownership is viewed by most Americans as their prime (and in many cases only) source of wealth and security. ("Land, Scarlett--it's the only thing that lasts.") The housing crisis has shaken that foundational value, so whatever we do, we need to restore confidence in the idea that home ownership has value.
When I float this idea it's always met with moral outrage about bailing out homeowners who made bad decisions, but I'd rather do something that would work and aims money at ordinary people, than watch Treasury flail away at doing things that won't work and aim money at people who are definitely not ordinary.
The goal here is not to provide a handout, it's to stabilize neighborhoods and public confidence.
November 16, 2008 1:23 PM | Reply | Permalink
http://www.pbs.org/newshour/newshour_index.html
November 14, 2008
(Download) Mortgage Help
A look at a newly unveiled plan from the Federal Deposit Insurance Corp. to prevent further home foreclosures through loan modification programs.
At 04:30 on the feed.
The interviewee tells it like it is. The banks won’t reduce the interest rates, because the banks will lose money.
Everyone else is losing, but the banks want exemption.
Greedy bankers
A friend of mine has a solution, and I'll admit it sounds extreme. His plan: When the banks take over a house, the government is going to give the banks a bailout anyway.
Then bulldoze to the ground the repossessed home.
Reducing the supply, and then prices will go up.
The better idea is reduce mortgages to I/O for 5 years, until market stabilizes. Financed through SAVE AMERICAN HOMEOWNERS BOND
November 16, 2008 3:21 PM | Reply | Permalink
As you know, we differ on the issue of making the program interest-only. These mortgages need to get paid down.
November 16, 2008 3:49 PM | Reply | Permalink
I am only recommending interest only, for a brief period of time.
I think this would stimulate the economy. Consumer spending would increase, Businesses would start selling again, and hiring workers.
Banks would still make money off the credit cards, and successful business profits.
If after 5 years and the economy is on sound footing, convert the 5 Year Arm I/0 to a fixed rate loan, 30 or 40 year term
If the economy is still faltering, 5 years from now, extend the interest only until the economy improves.
The banks are not looking at the long term, and are short-term foolish, killing the goose that lays their Golden Eggs.
Modifying loans for people, who are about to lose anyway, will not bring the stimulus needed at this time.
Giving everyone another stimulus check will be a short-term fix. Just enough time for the Christmas season, so stores will be able to reduce their inventory.
Why will the stores replenish or hire after the sales are over, when the fundamentals will still be weak.
I/O for limited term, with a view to fixed rates later, Doing this without lowering the cost of the house, A win/ win for the banks as (Assets) home prices stop falling.
Eventually as population growth absorbs available housing units.
Economics 101 - Supply and Demand
The auto companies will lower the interest rates, and they'll sell more cars. Lower the interest rates on housing and you'll sell more homes.
If the (money changers)bankers are to greedy, get them out of the mortgage business they're greed is killing us.
Finance shelter through Social Security
Another loming crisis on the horizon, the Student Loan Program.
November 16, 2008 6:27 PM | Reply | Permalink
I really don't want to budge on the interest-only issue--it's very important that the amounts owed on those bubble mortgages come down so they can match up better with the actual values/selling prices of homes in the neighborhoods.
So here is an alternate suggestion that you might like. How about if the feds pay part of the interest on the loan, and the homeowner is responsible for paying down the principal? There would be a minimum, but if the homeowner could manage to pay extra on the principal by taking in a boarder, skimping on other expenses, etc., that would be fine.
All other aspects of the program stay the same.
There is an added benefit to this angle, which is that any early payment on the mortgage will minimize the bank's profit.
November 16, 2008 7:13 PM | Reply | Permalink
Why should the Feds pay part of the loan? Why not have local agencies (angel investors) buy into the property, like "first time homebuyer" support available in some cities? The buy-in could be strict equity, no interest but fractional share profit at N years or if sold.
The basic requirements:
Homeowner must live in the home as sole residence.
Homeowner, bank, and investors must all take some hit, some loss or loss of expected profit/income.
Speculators must not profit.
November 16, 2008 8:47 PM | Reply | Permalink
Sadly, if this approach would work I think someone would already be doing it. There's just not enough immediate upside for investors to consider sharing homeowner equity in slumping neighborhoods.
There might be a philanthropic organization or two that would consider piloting such a program (and I think it would be successful if well-managed) but if equity-sharing is going to be done on any kind of scale, it's going to have to be the feds who do it--either directly or through a transfer of funds to local agencies.
Right now the best reason for the Feds to embark on this program is to stabilize neighborhoods, to prevent bigger disasters down the road. It's not about bailing out people who made bad decisions, it's about stabilizing whole streets so that everybody can keep their balance sheets intact and so that people who need to move can sell their houses. From my perspective, the most efficient way to do that is to keep the bubble houses from going empty and killing the market for everyone.
November 17, 2008 11:52 AM | Reply | Permalink
Sadly the reason no one is doing it, IS GREED
When people have financial problems they call some one like Take Charge America, a debt counselor service, who intervenes in behalf of the debtor. Together they work out a plan with the creditors to reduce the payments to an affordable level.
A reduction in interest rates a possibility, the creditor recovers some of the money, and partial payment received every month.
The creditor accepts the intermediary help, or faces the prospects of the debtor filing bankruptcy.
Let the Fed take the position of these debt counselor services. The individual homeowners would pay the Fed, who in turn pays the creditor.
The debt counselor doesn’t own the assets; he’s just assisting, until, such time as the homeowner can get back on his feet.
If the banks want to recover the lost money from the interest rate reduction, he’ll have to recover at the end of the term.
The homeowners under periodic review must report any increases in income, and their ability to repay the loan at the original terms.
The Mortgage company instead of sending and hounding the homeowner or debtor would bill the Government, with 90 days to pay.
November 17, 2008 1:01 PM | Reply | Permalink
Does everyone understand that "loan modification" programs being trotted out by the banks (and even FDIC's program which is braver than any others) are not likely to work?
They won't work for individuals because being able to afford your mortgage payment is only part of the issue.
If the bank helps you make your payment on a house that's now "worth" half of what you paid for it, very few people are going to sign up for that. (Especially if they're only able to pay the interest and not pay down the principal!) It pretty much turns your house into a giant maxed-out credit card--and I think we all know folks will not be willing to pay indefinitely on a maxed-out debt of that size. Why in the name of God would they, especially if they have to mow the lawn, fix the toilet and deal with spiking crime rates in their neighborhood at the same time?
This is why people are walking away from their homes--not because they are stupid or bad people who deliberately tanked the economy, but because they've given up on the idea that real-estate based security is within their grasp, at least for the next few years and possibly forever. It's impossible to underestimate the impact of this slump in confidence.
November 16, 2008 4:04 PM | Reply | Permalink
I think the latest proposal from Bair at FDIC is crazy.
November 16, 2008 8:49 PM | Reply | Permalink
Why?
November 16, 2008 10:39 PM | Reply | Permalink
Giving $1000 to loan servicers to renegotiate mortgage terms, for starters.
November 17, 2008 1:11 AM | Reply | Permalink
Do you think it should be more?
I am half serious with this question. The banks are in a werd spot here. On the one hand they are looking at mortgages that can't be substantially modified without risking lawsuits from the eventual holders of the securities they represent. On the other hand many of the loans are ultimately backed by the fed if the bank ends up foreclosing on the homeowner. Either way, there's little incentive for banks to modify loans in a way that's substantial enough to keep people in their houses.
Which supports my contention that if we want to stop housing's parade over the cliff, we are going to have to get the feds to do the equity sharing.
November 17, 2008 12:27 PM | Reply | Permalink
Treasury Secretary Paulson single-handedly created the viral, metastatic catastrophe of the global expansion of the financial crisis by not backstopping Lehman and thus forcing them into bankruptcy.
He did it because he was angry with Richard Fuld, CEO of Lehman. That's it! A personality problem, a fit of pique and spite, brings down the markets and the world.
It was nothing more than a whopper of a bad decision for which we and billions of ther people will all be suffering for years to come.
November 16, 2008 4:12 PM | Reply | Permalink
Any ideas on why he did in WaMu by not putting it on the "no short selling" list? Seems pretty clear to me that WaMu stock diving and the run on the bank by depositors are related.
To be fair to Paulson, Lehman was pretty weak. Maybe the market just needed a failure and Lehman happened to go at the wrong time (for Lehman creditors).
November 16, 2008 8:53 PM | Reply | Permalink
Isn't it true that devaluing the dollar will solve a lot of our problems, especially if that devaluation is actually a few years of double digit inflation? People like me will suffer greatly if that is the solution, since we retirees have no way to protect ourselves from inflation. But, that can be handled with a big increase in SS payouts, surely cheaper than the multi trillions of dollars needed for any other "fix".
November 16, 2008 5:34 PM | Reply | Permalink
Hoppy, I don't know, maybe it would help. But it seems to me that whatever we do has to make sense to ordinary people who are watching their finances go down the tube. I don't feature folks going "Oh, hey, the Feds devalued the dollar--we're saved!"
November 16, 2008 7:33 PM | Reply | Permalink
hoppycalif:
1. INT'L ECON 101: The last time the dollar was "devalued" was in the early 1970s under the "Bretton Woods" system of fixed exchange rates. Under the (mostly) floating exchange rate system system operating since then, currencies such as the dollar DEPRECIATE or APPRECIATE. The difference between "devalue" and "depreciate" is much more than just semantics. Depreciation is a process that happens more through market forces than government policy (although both are still relevant obviously).
2. If the rest of the world is bound and determined to buy (sell) dollars, there is damn little the US gov't can do to force a depreciation (appreciation) against those forces without resorting to kind of revolutionary shock to the financial system that would probably bring abouty another Great Depression of the kind so many exaggerated parallels are being made to already nowadays.
3. Of course retirees have ways to protect themselves against inflation. One of them is called the money market fund (also invented in the 1970s). These are fairly safe too, now that they are sort of covered by FDIC. This also points to a reason why inflation would not be the panacea it was before the 1980s. It worked in the past partly because large numbers of people got screwed that now can adjust instead.
4. All the above said, your basic point -that the ultimate fix may turn out to include a mixture of a low dollar and high inflation- makes sense. I doubt, though, that this will be a smooth or straightforward way of avoiding trillions ALSO being wasted on other "fixes." Future generations of taxpayers (one group NOT able to adjust to inflation and federal borrowing occurring before their time) will bear the burden of that legacy, along with other great stupidities -like failing to cure slothful addiction to oil- that today's politicians and public in the USA will be remembered for.
November 17, 2008 7:01 PM | Reply | Permalink
http://www.counterpunch.org/whitney11142008.html
"The Treasury's new Financial Stability Oversight Board has met four times, but they still can't say how the banks are using the money. It's a joke. Congress has been missing in action, too. They promised to create their own oversight board, but five weeks have passed and still nothing has happened. Apparently, the idea throwing $700 billion down rathole isn't enough to prod Ms. Pelosi and her congressional cohorts into action. All that really matters to them is getting reelected and nuzzling ever-closer to the public trough."
Im not an economist. I kept looking for an explanation of what the hell was going on when they first started yapping about the need for a bailout. Like.. where's the powerpoint? Explanations were not forthcoming. A lot of us have been reading Mike Whitney, Peter Schiff, Craig Paul Roberts and many others for the past 4 years. They were all saying, "WTF? We are headed for a financial disaster". Disaster is here. And still all we get are the usual smoke and mirrors.
November 16, 2008 6:06 PM | Reply | Permalink
Yeah, facts have been in desperately short supply.
Maybe I'm not paying enough for them?
November 16, 2008 8:55 PM | Reply | Permalink
Yes, Congress does seem to be missing in action.
Does Congress want to hide behind Paulson and distance themselves from the blame that will come when Paulson fails to help Americans with yet another giveaway of their tax money? Will Congress then put on a too-little-too-late oversight hearing filled with passionate cries of indignation that the money is gone and was misspent?
I'm confident those in Congress who sat by and enabled things come to this in the first place are not willing or even qualified to help us out of this mess. Jobs that require professional expertise at doing what special interests tell you to do are probably not in high demand by competent leaders. But I am hopeful that there are some real leaders of good will--who love a huge challenge-- busy looking for a way to improve the system and undo all this wreckage.
American denial seems of epic proportions these days. The same thought comes to mind at every new downward turn: The hard evidence that we need lots of new leadership is the fact that the two parties in Congress do somehow muster up enough votes between them when it comes to issues like bailouts of other failed organizations and unnecessary war. Yet the same group can't seem to agree upon anything that would benefit the taxpayers whose money they are busy handing out.
What about this categorical failure of our representatives to agree upon or adequately fund solutions for the basic taxpayer issues, such as education, food and toy import safety, health care, social security, border security, federal emergency management, etc.? These patterns are all accidents?
I see no way out of the bailout mess or any others to come until we all stop voting for excuse candidates who don't promptly deliver concrete results. My money says that some serious pressure and accountability can go a long way toward good solutions to all those conveniently labeled “no easy answer” issues. I also see no way out unless we insist on publicly-funded campaigns that provide an even playing field that allows the real leaders to rise to the top.
November 17, 2008 12:04 PM | Reply | Permalink
At the end of the day, every way we turn, no one is being held accountable for anything. It's getting frustrating / annoying.
Guantanamo, domestic spying, big 3 auto, the recent oil price gouge, TARP, melamine in everything, constitution shredding, fraudulent mortgage industry, Katrina, Palin, Iraq, Wall Street in general.
Presidents, CEO's, Directors, shareholders: Here have some money and do or don't do it again!
November 16, 2008 8:05 PM | Reply | Permalink
I don’t know the exact figures, of the breakout of P/I Principle and Interest.
It has been said that it takes many years of monthly payments, when you actually pay more towards the principle because you’ve paid the interest up front.
This being the case, to do I/O till this financial crisis has abated, would result in a faster stimulus.
Giving some the opportunity, to pay down on the unpaid balance, would be an eventual goal.
The problem right now; people are walking away from their homes now. Why would they want to keep paying on a depreciable asset, paying what towards the principle? Who is setting the principle?
The idea of the I/O for a limited time does not reduce the value of the house, despite its present depreciation, but it lowers the cost of the money to hold the asset, the lower interest rates allow an affordable alternative for people to stay in their homes, rather than walking away looking for rental property. Abandoning the asset altogether, with it’s ancillary problems to the community.
I/O is basically paying the bank rent, or leasing from the bank, with the option to buy.
If the economy strengthens the value of the home will appreciate.
Because the market is flooded with foreclosures, the banks presently have to sell the homes at a loss; they could sell when it is more profitable or less expense to them. Reducing their losses overtime, or spreading the loss, may actually benefit the bank in the future, having someone in the home making I/O, reduces the risk to the bank.
In the past I showed that I/O on $200,000.00 from 8% to 4.75 % was approximately $500.00 X 12 months = $6000.00 per year loss, of interest to the banks, yet they’re willing to leave $100,000.00 dollars on the table at auction?
The banks are doing what the OPEC cartel is trying to do.
OPEC has oil, the banks have money.
OPEC wants more per barrel, the banks want more for they’re money
OPEC reduces inventory, the banks reduce loans
Threats or fears of upheaval will drive the cost of oil higher, the same is true of the money, and fear drives up the cost.
The banks say they won’t lend because of the fear, of course if your scores are good and you’re willing to pay through the nose we’ll give you oil, I mean money.
The solution:
Oil side of equation DRILL BABY DRILL, Alternative fuel source.
Fear of alternatives, drove the price of oil down.
FEAR of ALTERNATIVE FINANCING
Will drive the price of money down. The banks won’t lower the cost; they’ll just lower the output. Charging more for what’s available. The people have an Administration who supported terrorist, through the purchase of foreign oil, and now support Greedy bankers.
If the Government through Bonding or borrowing from the Social Security Trust Fund, were the alternative, then let the banks find another source of borrowers, to finance there Cartel.
November 16, 2008 8:28 PM | Reply | Permalink
Resistance,
Payments on the principal cut the eventual cost of the property sustantially. I/O is how we got ourselves into this situation where people have absolutely zero equity in their houses even in neighborhoods where values have remained stable.
Also, please remember that substantial alterations to the loans may not even be practical--they are pre-existing contracts.
November 17, 2008 12:34 PM | Reply | Permalink
The key word you used is eventual.
Eventually as the supplies of homes diminish, the prices will stabilize. Demand is still there, but not at the current interest rates.
Pre existing contracts won't be worth the paper, it's written on, if the Nation grinds to a halt.
I/O was not the problem, the raise in ARM rates contributed to the problem, besides the increase in fuel costs.
The Fed responded improperly, so worried about inflation, they raised rates at the wrong time. Of course those who benefited by increased rates loved interest rate hikes.
Look now, they killed the Nation with misguided policies, to slow to respond and misleading statements about the soundness of the Economy.
I base my investment strategy not on speculation, but on what the Fed tells me, they lied. The economy was bad and their insider friends knew it.
Erica look above to one of your previous postings and I address another issue you raised about I/O
November 17, 2008 1:19 PM | Reply | Permalink