Senators to Paulson: You Lied, TARP died
Three GOP Senators have sent Treasury Secretary Hank “Never mind” Paulson a “joint letter of concern.” I’ll have more on this abominable subject in my syndicated column tomorrow.
Joint Letter of Concern to Secretary Paulson After His Announcement to the Change Intent of the Troubled Asset Relief Program
November 13, 2008
Dear Secretary Paulson:
We are writing to express our deep concern over your announcement this morning that the Department of the Treasury will halt all plans to purchase trouble mortgage assets through the Troubled Asset Relief Program (TARP). We are concerned that the program has been fundamentally changed from its original intent and worry that continued changes may erode the structures of accountability put in to protect taxpayers.
When legislation authorizing the TARP was first proposed to members of Congress in mid-September, its primary component was a program to allow the Secretary of the Treasury to purchase “toxic” mortgage assets from financial institutions. The primary reason for this course of action, we were told, was to assist the market in discovering the price of these assets and to return liquidity to the financial markets.
At a hearing of the Senate Banking Committee on September 23, 2008, you made the following comments on the urgent necessity of a troubled asset purchase program:
We have proposed a program to remove troubled assets from the system. This troubled asset relief program has to be properly designed for immediate implementation and be sufficiently large to have maximum impact and restore market confidence. It must also protect the taxpayer to the maximum extent possible, and include provisions that ensure transparency and oversight while also ensuring the program can be implemented quickly and run effectively.
This troubled asset purchase program on its own is the single most effective thing we can do to help homeowners, the American people and stimulate our economy.
Although the legislation was passed on October 3, the program was never implemented and now has been officially abandoned in favor of alternative plans after little more than a month. Such a rapid reversal raises questions about the TARP’s original design as well as the propriety of future plans.
Congress never intended for the TARP to be a blank check that could be spent with unlimited discretion. To ensure proper boundaries are in place to protect the taxpayer, we hope and expect that congressional approval will be sought by the administration before further changes are made.
Sincerely,
U.S. Senator Tom Coburn, M.D., U.S. Senator Richard Burr, U.S. Senator David Vitter
From the Wall Street Journal's Real Time Economics
ReplyDelete(Insights and Analysis from WSJ)
Sept. 25, 2008
Running Numbers on Treasury Bailout Plan
Since the Treasury Department announced the $700 billion Troubled Asset Relief Program, debate over the size of the program has raged. Some lawmakers balked at the huge amount of money that the government would have to lay out, while others said it was too small to deal with the problems in assets tied to mortgages. One look at the numbers, though, suggests it might be just right.
In a research note Thursday, Goldman Sachs estimated that there are probably about $1.15 trillion in distressed assets in the market. To arrive at this conclusion, the economists Jan Hatzius, Andrew Tilton and Kent Michels looked at the percentage of commercial and residential mortgages in foreclosure or delinquency and compared it to the total value if U.S. mortgages. They estimate that approximately 9.16% of $11.3 trillion in residential loans are at risk of not being repaid, and 4.24% of commercial loans are in the same boat.
That number is higher than the figure proposed by the Treasury, but it represents the face value of the mortgages. Since the discussion focuses on delinquent or foreclosed loans, the government should be getting a discount. Paying as high as 70 cents on the dollar would translate into $1 trillion in buying power for $700 billion.
However, Goldman noted that its numbers should be taken with a grain of salt. “They could either be too optimistic or too pessimistic. On the one hand, further home price declines would likely result in a further increase in the amount of troubled assets. On the other hand, more than half of all delinquent (residential) mortgages are less than 60 days past due. Only some of these are ultimately likely to default,” the economists said.
It might be easier to make the case for the pessimistic view of the numbers. Delinquencies and foreclosures have been on the rise for months, if that trend continues it means an increase in the number of loans facing distress is more likely than a turnaround for loans currently delinquent. And while there have been some indications of stabilization in home prices measures such as the S&P/Case-Shiller index, other metrics, such as affordability, suggest home prices have further to fall. –Phil Izzo
Jersey Girl said...
ReplyDeleteFrom the Wall Street Journal's Real Time Economics
(Insights and Analysis from WSJ)
Sept. 25, 2008
Running Numbers on Treasury Bailout Plan
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the problem is this article from wsj is out of date. the point is paulson has shifted away from buying up mortgages - the original justificantion for the bailout - to giving cash to the banks. It is not clear that there is any regulatory mechansim for $700 billion
Actually, the news you are getting is dated and frankly being reported now for political reasons rather than as sound economic analysis.
ReplyDeleteIf it would have been widely reported back in Sept, it may have further hurt the Republicans. Now this can be the beginning of the "blame games" which Republicans hope will set the stage for the next election.
Those interested in economics,should read the Wall Street Journal which reported today that nothing has materially changed under Paulson's plan since September (this article incidentally appeared on the bottom of the second page).
"Sen. Mel Martinez (R., Fla.), adding that he was "honestly surprised" by the way the government's $700 billion rescue plan has evolved.
Sen. Robert Casey Jr. (D., Pa.), who sits on the Banking Committee along with Mr. Martinez, said lawmakers were frustrated "on a number of levels" because Treasury..... (hasn't be able to) slow record numbers of foreclosures."
"Treasury Secretary Henry Paulson said he intends to focus on investing Treasury funds directly into banks and other financial institutions, and on unclogging markets that fund consumer debt."
This change was initially announced on SEPTEMBER 29 as the article continues to elucidate:
"Mr. Paulson had already moved away from the (initial) idea. On Sept. 29, he watched as markets swooned in reaction to the House's initial rejection of the $700 billion bailout bill. Mr. Paulson began to realize then that asset purchases wouldn't be enough to turn markets around"
"The day after the vote, Mr. Paulson ordered his staff to start figuring out how an equity-investment program might work instead."
Because:
"If the government purchased securities from banks, they would likely have to record further losses on the markdown price, which many could ill afford."
This "news" was reported in the WSJ and financial blogs back in Sept.
What IS news however, is that on November 12, it seems that some of our elected officials have FINALLY just now realized what deep hot water the US economy is in.
Paulson announced back in September that (the initial) plan would have taken too much time, and that the Treasury instead will rely on buying stakes in banks and encouraging them to resume more normal lending.
Now that the election is over some of our elected officials have had time to catch up on their reading and maybe even begin to realize that what many have been saying was bound to happen since the President Reagan's 1986 tax cut, has now happened.
Beginning in the late 1980s and continuing in the early 1990s Ross Perot began speaking out about what he described as the failings of the United States government. Perot asserted that the United States "had grown arrogant and complacent after the War (World War II)" and was no longer the world's greatest nation. Instead of looking into what was to come, he argued, America was "daydreaming of our past while the rest of the world was building its future."
ReplyDeleteHe said:
"Go to Rome, go to Paris, go to London. Those cities are centuries old. They're thriving. They're clean. They work. Our oldest cities are brand new compared to them and yet… go to New York, drive through downtown Washington, go to Detroit, go to Philadelphia. What's wrong with us?"
Perot did not support President George H. W. Bush and vigorously opposed the United States involvement in the 1990-1991 Persian Gulf War.
However, Perot's plan of reducing government spending was never a viable option for ending recession. Nobel Prize-winning economist Paul Samuelson likens the concept to "starving the patient to death to get rid of his tapeworm", stating further:
"If low interest rates were really the secret to economic growth, historians would look back fondly at the Depression years. In the 1930s, government bonds paid one percent interest. The prime rate--the interest rate banks charged their best customers--was only slightly higher. Business still wouldn't invest. During the Depression, John Maynard Keynes invented the term "liquidity trap" to describe the situation: return on investment was so low, capital had no reason not to stay "liquid."