TARP to TARP
Posted: September 2008
Those cute boys in DC have come up with a moniker, another folksy acronym that will quickly roll off tongues of every day people from Wichita to Wyoming, to define their Troubled Asset Relief Program (TARP). We should all be looking out that this TARP doesn’t end up a TRAP – Taxpayer Responsibility Abduction Plan, wherein our hard working, tax paying retail investors bail out incredibly insane, risk running quants and their snotwaffle overlords on Wall Street.
Let’s understand, first, where all this nonsense came from. Overbearing legislators in Florida, California, New York, Nevada and similar states with ever spiraling home price bubbles pushed Fred and Fan to guarantee an ever expanding feeding trough of legal, quasi-legal and overtly illegal mortgages plans concocted by innovative brokers, lenders and charlatans with the happy assistance of our corner banks and lending institutions, who promptly sold that garbage paper to investment banks that in turn, sliced and diced them beyond any possible recognition and sold the secondary, tertiary and lesser derivatives to impossibly naïve, stupid, greedy or misguided buyers everywhere.
These multiple levels of derivatives became “Structured Investment Vehicles” or, as we prefer, “Smoking Implosion Vehicles”, with references in trade and professional journals calmly discussing them as “contingent, off-balance sheet liabilities”, pretending that there was some underlying sense or financial reality to them. When the bubble started to pop – and all bubbles do pop, usually very quickly – banks, hedge funds, pensions funds, and investment houses started wondering who these “contingent” liabilities were liabilities to and realized rather abruptly that it was themselves. A Pogo moment, if ever there was one.
Once we appreciate that the people being blown apart by these goofy financial “innovations” were the very people that created, bought, sold and profited from them, we can appreciate how delicious the TARP name is. After all, a tarp is a thing you buy to toss over something, to conceal it or protect it. Out here in the country, we use them all the time only generally not, as in this case, to cover rotted corpses of financial manure. Out here, we think it is best to let odiferous piles sit open so sunlight and clean breezes can cleanse the mess and, eventually, render it tolerable.
Our government prefers to cover up the mess – hide the balance sheets and conceal the puke chucked by our financial institutions, hoping desperately the world and, more importantly, the voters don’t notice anything, at least until after the election. TARP, a creation of Goldman Sachs wonder child and CEO Henry Paulson, is much more likely a TRAP – an incredibly painful wallet hold trap for generations of taxpayers nationwide.
As promoted, this bailout for Paulson’s good pals on Wall Street and their kindred spirits in finance houses worldwide, will put on the taxpayers responsibility for whatever misdeeds or financial ills inflicted on society by those miscreants. There is no talk of claw backs, forcing the CEO’s and executives of companies like Bear Stearns (oops, they died), Fan and Fred, Lehman (oops, again), Merrill Lynch, Morgan Stanley or the others to give back the hundreds of millions they personally made selling this trash paper. There is no talk, either, of the Government taking huge equity positions in the companies that are being bailed out, unlike the treatment AIG got and deserved. There isn’t even any talk, at least yet, of any significant oversight or regulatory improvements that might hint at avoiding a future meltdown of this nature, a severe omission helping to insure that TARP is a TRAP.
Sadly, much of the problem at hand can be resolved relatively easily. Start with tweaking the mark-to-market rules, follow with a modest guarantee on interbank and bank to business short term lending, and finish with a massive injection of energy toward developing meaningful international tools of monitoring derivative trading, then look to see where we’re at. Understand that most of the issues at hand are not economic or financial in nature – they’re nature in nature. That is, no one who lends can trust anyone that wants to borrow, including themselves. The hidden derivative markets, where the SIV’s are buried, and the obtuse relationships between derivative traders that no one knows or understands, have created mistrust between all the players such that business can not be transacted.
Mark-to-market, a wonderful tool to create reality on balance sheets (and that is an oxymoron from day one) needs addressing quickly before the entire marketplace seizes up. The FASB should immediately permit market values to be held on a cost basis for all performing, non-delinquent loans and mortgages. 80-85% of loans being marked down are performing loans, yet banks and mortgage holders are being forced to write down those values as if they were being sold today; this is inane. Allowing loans that are not delinquent to remain at cost on the books relieves nearly all the pressure on good, solid institutions to raise capital by dumping assets or issuing equities in a down market and, best of all, allows well run finance institutions to rise above the bottom feeders and shine bright for all to see.
We have never endorsed anything that obscures financial reality as expressed in financial statements. Indeed, mark-to-market was praised in this space many times and heralded as a radical improvement over previous accounting rules. Events, however, have proven this particular rule to have a devastating weakness that should be fixed before it, unaided and alone, devastates the national financial system.
As a second step, Paulson and his Players need to get off the idea of bailing out institutions responsible for the mess and using tax dollars in doing so. Rather, a simple guarantee by the government of upcoming transactions should be the focus. If a bank or humble investment house is undercapitalized because they issued bad loans or bought bad paper from those that did, it should be their problem, not the taxpayers. To insulate honest people from Wall Street snotwaffles, however, is the governments problem and can be accomplished by backing the short term paper, interbank loans and commercial paper needed to keep business going. While opportunity exists for abuse, it is much harder to hide and much lower in volume than trying to fix transactions occurring months or years ago and much easier to fix responsibility on the responsible instead of the taxpayer.
Finally, we need to do something with this derivative market so everyone can see it, know who is doing what to whom and for how much. An international clearinghouse is the minimum requirement, tracking every trade and every counterparty, around the globe. Institutions participating should receive some assurances, financed by each of them as a cost of participating, that counterparty promises to pay will be honored while anyone wishing to trade in derivatives without participating in the clearinghouse is overtly told they have no recourse. Drawing back the drapes on derivatives is essential; only cleansing sunlight will keep this bunch of traders honest and trustworthy.
