Conglomerate Blog: Business, Law, Economics & Society

« Conglomerate Book Club: The Law Market | Main | The Death of the Deal Toy? »

February 10, 2009

The TARP II Unveiled; A Quasi-Liveblog

Posted by David Zaring

Timothy Geithner just finished talking about the second half of the bailout, and the speech goes, if you care about how to make this rhetoric work (and Geithner didn't do a bad job):

We need banks, they are crucial
But yet banks should be flogged for taking risks and jeopardizing the financial system, etc
The government (read: prior administration, of which Geithner was a part) blew it too: "when action came it was late and inadequate," and there's some blame laid on "overlapping" regulation, which is a suggestion that financial regulation in the country should be reformed, probably not to the benefit of the SEC or OTS.
when TARP was passed, the government pulled the financial institutions back from the brink, so good on the TARP ... but the first installment hasn't quite done the job.
Geithner then turns to the tricky job of justifying his decision "not to supplant and discourage private capital," given that said capital has proven unable to manage risk with its own money, and, in his view, should now be asked to manage risk with our money. How does he do this? He claims that in the past, "crises lasted longer ... because government applied the brakes too early," and that his model - supporting private capital - is designed not to their benefit, but is the most likely approach to "get the economy back on track."
The downer finish: "This strategy will cost money, it will involve risk, and it will take time" and "we will make mistakes."

Enough of the rhetoric, what is the plan?

new transparency directives, on compensation, the use of bailout funds, etc, will be at www.financialstability.gov, continuing the government's recent but ardent love of e-rulemaking. It is, as of this writing, not up and running.
Direct capital injections into banks, which would come out of the remaining $350 billion in the Treasury’s rescue program.
A public-private investment fund "targeted to the legacy loans ... now burdening" the bad assets on financial institution balance sheets: this sounds like a bad bank, and it may not be totally different from Lucian Bebchuk's suggestion, though Bebchuk wants to set up a bunch of mini-funds to compete for troubled assets on price, and it isn't clear that Geithner's vision provides for this sort of competition. Anyway, the initiative is big, and could be a big payday for Wall Street; it is expected to use up to $500 billion, but some of that will come from the private sector.
Help for homeowners - Geithner rachets up the consumer protection part here ... "our focus will be on using the full resources of the government to help to bring down mortgage payments," under EESA. The devil is completely in the details here, so consider me unimpressed, but word is that it will amount to $50 billion, which used to sound like a lot of money.
Restart the securitization markets. This is being done by the Fed, along with Treasury, and is supposed to provide some consumer relief as well as restarting the credit markets. How? The Fed has announced that it will loan money to the already extant TALF, up to $1 trillion, yes, that's a trillion dollars. The TALF is about troubled assets, or "term asset-backed securities," in that they go away after a time:

Under the current specification of the TALF, the Federal Reserve Bank of New York will lend to eligible owners of certain AAA-rated asset-backed securities (ABS). The Federal Reserve had previously announced that it would accept AAA-rated asset-backed securities backed by newly and recently originated auto loans, credit card loans, student loans, and SBA-guaranteed small business loans as collateral for TALF loans....
[The revised facility] could broaden the eligible collateral to encompass other types of newly issued AAA-rated asset-backed securities, such as commercial mortgage-backed securities, private-label residential mortgage-backed securities, and other asset-backed securities. An expansion of the TALF would be supported by the provision by the Treasury of additional funds from the Troubled Asset Relief Program.

Treasury will also backstop Small Business Association lending, which doesn't seem like a big deal.

New legislation is probably coming, Geithner says Barney Frank and Chris Dodd are being consulted already, and there's a global angle to reform, being done through the G20. I say it a lot, but those who do not believe that global networks matter in establishing domestic governance standards will have to grapple with the fact that a global network will set much of the reform agenda in the aftermath of this crisis.

UPDATE: The markets have collapsed during the speech, perhaps because of the lack of detail (but, of course, it could be because there was more downward pressure on stocks than upward pressure). Do we know what the government will do now? I sympathize with the critics, but judge for yourself: the fact sheet is available here.

Financial Crisis | Bookmark

TrackBacks (0)

TrackBack URL for this entry:
https://www.typepad.com/services/trackback/6a00d8345157d569e20105371db04f970b

Links to weblogs that reference The TARP II Unveiled; A Quasi-Liveblog:

Timothy Geithner just finished talking about the second half of the bailout, and the speech goes, if you care about how to make this rhetoric work (and Geithner didn't do a bad job):

We need banks, they are crucial
But yet banks should be flogged for taking risks and jeopardizing the financial system, etc
The government (read: prior administration, of which Geithner was a part) blew it too: "when action came it was late and inadequate," and there's some blame laid on "overlapping" regulation, which is a suggestion that financial regulation in the country should be reformed, probably not to the benefit of the SEC or OTS.
when TARP was passed, the government pulled the financial institutions back from the brink, so good on the TARP ... but the first installment hasn't quite done the job.
Geithner then turns to the tricky job of justifying his decision "not to supplant and discourage private capital," given that said capital has proven unable to manage risk with its own money, and, in his view, should now be asked to manage risk with our money. How does he do this? He claims that in the past, "crises lasted longer ... because government applied the brakes too early," and that his model - supporting private capital - is designed not to their benefit, but is the most likely approach to "get the economy back on track."
The downer finish: "This strategy will cost money, it will involve risk, and it will take time" and "we will make mistakes."

Enough of the rhetoric, what is the plan?

new transparency directives, on compensation, the use of bailout funds, etc, will be at www.financialstability.gov, continuing the government's recent but ardent love of e-rulemaking. It is, as of this writing, not up and running.
Direct capital injections into banks, which would come out of the remaining $350 billion in the Treasury’s rescue program.
A public-private investment fund "targeted to the legacy loans ... now burdening" the bad assets on financial institution balance sheets: this sounds like a bad bank, and it may not be totally different from Lucian Bebchuk's suggestion, though Bebchuk wants to set up a bunch of mini-funds to compete for troubled assets on price, and it isn't clear that Geithner's vision provides for this sort of competition. Anyway, the initiative is big, and could be a big payday for Wall Street; it is expected to use up to $500 billion, but some of that will come from the private sector.
Help for homeowners - Geithner rachets up the consumer protection part here ... "our focus will be on using the full resources of the government to help to bring down mortgage payments," under EESA. The devil is completely in the details here, so consider me unimpressed, but word is that it will amount to $50 billion, which used to sound like a lot of money.
Restart the securitization markets. This is being done by the Fed, along with Treasury, and is supposed to provide some consumer relief as well as restarting the credit markets. How? The Fed has announced that it will loan money to the already extant TALF, up to $1 trillion, yes, that's a trillion dollars. The TALF is about troubled assets, or "term asset-backed securities," in that they go away after a time:

Treasury will also backstop Small Business Association lending, which doesn't seem like a big deal.

New legislation is probably coming, Geithner says Barney Frank and Chris Dodd are being consulted already, and there's a global angle to reform, being done through the G20. I say it a lot, but those who do not believe that global networks matter in establishing domestic governance standards will have to grapple with the fact that a global network will set much of the reform agenda in the aftermath of this crisis.

Bloggers

Papers

Posts

Subscribe to The Conglomerate

Sun	Mon	Tue	Wed	Thu	Fri	Sat
		1	2	3	4	5
6	7	8	9	10	11	12
13	14	15	16	17	18	19
20	21	22	23	24	25	26
27	28	29	30	31