Troubled Asset Relief Program Not Being Used to Purchase Troubled Assets At All

TARP was passed in early October, after a lengthy battle in Congress. Whereas it seemed that the battle over a rescue caused one massive decline in the US equity markets, its passage caused another and another. The latest news from Paulson that he is not using the monies for their original purpose is not only bound to cause more selling but signals further degradation of our economy.

Paulson indicated yesterday that circumstances changed while he was waiting for the passage of the TARP, and by the time it was passed, money needed to be used elsewhere. He seemed sincere when he emphasized that the original plan would “take time to implement and would not be sufficient given the severity of the problem”. He first turned his attention to supporting the banking system through capital infusions. As Sam Cass points out, a tremendous amount of money, over $150 billion in US commitments, has already been applied to proping up AIG, with an increasing likelihood of failure. Unfortunately, in times of economic distress (I am trying not to use the term "depression", although that is entirely clear at this point), banks seek additional capital to shore up their balance sheets. That is what the financial institutions receiving TARP monies are doing with it. They are not using this money to stimulate lending.

Then, there is the issue that while Paulson seems sincere, the entire program has a credibility problem. As I stated in this article, the government was investing in 9 large financial institutions on terms that are not transparent, but are know to be significantly worse and in worse credits than Warren Buffett got in his investments in Goldman Sachs and GE. GE's and Goldman's stock prices today show how bad of an investment this was for Buffett. Whereas Buffett can make a bad investment or two with a small investment, our government should be held to a higher standard with large amounts of taxpayer money.

After all of the capital infusions (presumably AIG and the 9 banks), there are $410 billion left in unallocated funds in the TARP. Paulson did speak braodly and vaguely of using TARP monies to support markets for securities backed by consumer debt through a new asset backed commercial paper program. Obviously, this would be more in line with TARP funding goals - however, the fact that he is now focused on consumer debt rather than mortgage debt indicates that Paulson knows that there is another shoe to drop here. Paulson also spoke broadly of doing something to stop the wave of foreclosures and keeping people in their houses. However, it is entirely unclear how he proposes to do that.

However, the focus of this money continues to be on another wave of capital infusions. Paulson is hoping that the banks will raise additional monies and that the government can invest side-by-side with private investors. This is basically an acknowledgement that the first wave of investments was not a good deal for the US taxpayer, and that the second wave could be rationalized by some sort of market pricing. Given Abu Dhabi Investment Fund's and all of the other sheiks records of investment in Citibank, Bear Stearns and Lehman, I am not sure that I want my government looking at these guys to rationalize the taxpayers' investments.

And, then the Democrats want to use the TARP money to bail out GM.

But, none of this is going to do anything to stimulate lending. When Congress was told to pass TARP, they were told that it was the only way to open credit markets, and to stimulate lending. With the government as a market participant, the blood would get to the extremities that need it quickly. The blood is getting there because that isn't what the government is doing.

Congress was also told that the government might get some sort of return on its investment. Now, the money is going away quickly and there is going to be very little to show for it.

It is looking like Congress's first impulse - not to write this large and black check to an outgoing and incompetent administration - was the correct one.