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Is Paulson's TARP a TRAP?

by: Kathy Lien September 25, 2008 | about stocks: UDN / UUP    

Kathy Lien

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For the second day in a row, yesterday Federal Reserve Chairman Ben Bernanke and US Treasury Secretary Paulson pleaded to the power players of Washington to pass their request for $700 Billion to implement their Troubled Asset Relief Program [TARP]. However if we move the letters around a bit, TARP becomes TRAP and that is exactly how many investment managers, economists, politicians and average Americans view the plan. They are afraid that this is a trap for US taxpayers because they may be paying for a bailout that benefits the private and not public sector. Bernanke argues that a failure of the private sector would have “grave” consequences for the public sector, which is true and Paulson has finally agreed to accept limits on executive pay under the bailout plan. Yet, Wednesday’s price action in US stocks and the US dollar suggest that some investors are holding out the hope that Paulson’s TARP does not become the trap that keeps Americans still paying for bailout many years to come.

LIBOR Rates Jump, TED Spread Widens

Other investors on the other hand are more skeptical. Three month LIBOR rates jumped 26 basis points to 3.47 percent, which is the highest level since January. The TED spread, which measures the difference between the interest rates of the 3 month LIBOR and the 3 month Treasury bill hit an intraday high of 311 basis points. Not only is this only the second time in 2 decades that the TED spread has gone above 300bp, but the premium is far above its pre-credit crunch levels of 20 to 30 basis points. The greater the TED spread, the greater the degree of risk aversion and the fear of default in the market. Therefore the jump in the LIBOR and the widening of the TED spread suggests that investors are still hoarding their cash and they are skeptical of whether the government’s efforts will actually restore stability in the financial markets and improve risk appetite.


Paulson’s Plan Could be a Lose-Lose for the US Dollar

Paulson Paulson’s plan is ultimately a lose-lose situation for the US dollar. If it is approved, it would cause a destruction of the US balance sheet by increasing the nation’s debt ceiling by 6.6 percent to $11.315 trillion. If it is not approved or if Paulson and Bernanke only get a trimmed down version of the plan, they would have to go back to the drawing board to come up with other solutions to unclog the mess. If we end up being between rescue plans, the uncertainty would weigh on the US dollar. Therefore I still believe that the US dollar could fall another 5 percent over the next few months.

Home Sales, Durable Goods and President Bush

house Existing home sales dropped by 2.2 percent last month while mortgage applications plunged by 10.6 percent, the largest decline since July. The ongoing turmoil in the financial markets has made it increasingly difficult for even people with money to buy a home to secure loans. House prices continue to fall with the median price declining 9.5 percent from last August, causing more homeowners to pull their houses off market. The inventory of unsold homes dropped 7 percent, which was the largest decline since December 2006. In times of strong growth, a reduction of inventory may be good because it could suggest that demand is strong, but in times of weak growth, it suggests instead that homeowners are giving up on selling their homes now. Durable goods, jobless claims and new home sales are due for release Thursday morning. We continue to expect economic data to confirm that the US economy is weakening. President Bush will also be giving a nationally televised address on the financial crisis on tonight. Although we do not expect any groundbreaking announcements, his comments could nonetheless be somewhat market moving for the US dollar.

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This article has 6 comments:

  •  
    Sep 25 11:20 AM
    You may know more than Buffett or Bill Gross who believe the government, as I do, can make a fortune but I don't know the size of success of the portfolios you manage, if you manage any. Think the spread between what the Treasury pays for money and the cash flow.

    Manage correctly, which is easy but easy is difficult for Wall Street to comprehend, this is the greatest U.S. Government arbitrage, in fact of any arbitrage, in the world.

    Like Warren, I wish I could get a piece of the action. But, unlike Warren, I won't.

    The issuance of credit based on the value of the collateralize asset rather than the cash flow is over. You would think lenders would have learned that from the debacle years ago. Cash flow talks and hopeful appreciation walks.
    Reply
  •  
    Sep 25 12:41 PM
    This bailout is simply moving the problem from the losers on top of the economic ladder to the bottom where the burden is now on the average taxpayer that is near bankruptcy...marvelous going away gift from Bush to his cronies.
    Reply
  •  
    Sep 26 10:11 AM
    I have developed a plan to repair housing in America, which includes the NATIONAL REFINANCE PROGRAM. It is not a true “refinance”, but rather a stylized modification. This plan will work to relieve financial pressures on all homeowners, stabilize housing and create positive energy in the economy. My plan works from the “bottom up”…trickle up, so to speak. There would be less financial exposure to the taxpayer, and less initial support to Wall Street and Corporate America.
    My plan involves asking all American homeowners with mortgage debt if they would like a different mortgage plan. If they say yes, then their lender would convert their existing mortgage to a new plan. This “one size fits all” approach is necessary to simplify the management of this new class of mortgages. The end result would be to re-inflate the value of homes and mortgage assets.
    Once housing is stabilized with my plan, then the "new mortgages" can be dealt with by and between the various lenders, and Treasury and the FED, in a manner as they outline. This would put the front end of the solution directly into Main Street, and require the lenders, many of whom are at the root of the problem, to make the first investment in correcting the mortgage mess.
    Reply
  •  
    Sep 26 02:35 PM
    Let me simply my proposal by outlining a plan to address the current housing and mortgage crisis is not properly defining the problem-solution-benef...
    THE PROBLEM: Is not super low rates, is not toxic loans, is not bad underwriting, is not stupid borrowers. That is in the past. The current problem is that Main Street, basically homeowners, cannot financially function. My experience is that approximately 90% of the homeowners(those I have spoken with) who are in trouble are making significantly less income than they were 2 or 3 years ago. They cannot spend money because for many…their income has declined by 25-50%. We have an income problem at the bottom of the financial ladder…merely injecting money at the top of the ladder is not sufficient.
    THE SOLUTION 1: My “Plan” is centered on a GPM or GEM concept…that is a graduating payment, fixed rate mortgage…or a growing equity mortgage. These loans offer initial, scheduled payment relief for homeowners. The payment reductions should be sufficient to allow homeowners to make scheduled debt payments and provide for their families. ALL homeowners with mortgage debt would be eligible. This would be accomplished by “modification”. No debt is reduced. We are simply buying time to stabilize housing, and to encourage consumers to spend. This also puts the burden for execution on the companies who created the problem.
    THE SOLUTION 2: With the Paulson Plan, I would like to see limited injection of capital into the financial system. We need to allow SOLUTION 1 to be completed and then review the status of the financial market place to see if more work is needed.
    THE BENEFITS: My plan directly addresses Main Street, both the housing issue and the general economy. I believe that by injecting immediate relief on the ground level, as described above, that housing will find firm value, that consumers will begin to support their local merchants, that community banks will begin to work with their clients, and that, as the mortgage asset portions of institutional balanced sheets are simplified (only one loan program), clarified (all who need or want help will have the NRP loan, they’ll all be in one basket), and liquefied (the resulting basket of assets should be far easier to work with).
    SUMMARY: This plan will work to relieve financial pressures on all homeowners, stabilize housing and create positive energy in the economy. My plan works from the “bottom up”…trickle up, so to speak. There would be less financial exposure to the taxpayer, and less initial support to Wall Street and Corporate America.
    This “one size fits all” approach is necessary to simplify the management of this new class of mortgages. The end result would be to re-inflate the value of homes and mortgage assets.
    Once housing is stabilized with my plan, then the "new mortgages" can be dealt with by and between the various lenders, and Treasury and the FED, in a manner as they outline. This would put the front end of the solution directly into Main Street, and require the lenders, many of whom are at the root of the problem, to make the first investment in correcting the mortgage mess.
    John Preston
    Jcp999@gmail.com / 928-273-2248
    Reply
  •  
    Sep 26 10:37 PM
    Wall Street seems to have a hard time understanding that the current Credit crisis is not short lived and cannot be solved by a 700B bailout. The entire manufacturing and technological base of the US has been outsourced, with the result that US as a nation does not have good Technical job prospects in the next 10 to 20 years. With the current Free Market ideological rigidity preached by Wall Street this situation is not likely to change in the near future. Wall Street however does not want a taste of their own medicine and are trying to convince the Taxpayers to bail them out with a 700B heist. When an armed robber tries to take away from his "customers", he convinces the helpless customers that the alternative of not parting with ones wealth are WORSE. The only long term solution to this crisis is a discussion of how the Manufacturing and Technological base of this country can be restored, so that US citizens can direct their creative energies into great products that the World wants and needs(profits). Currently with a floundering Technological base, too many Americans are going into Law or MBA and the results are bad for everyone. Without factories I am not sure what will these MBAs do? Create what Buffet refers to as Financial Weapons of Mass Destruction.
    Reply
  •  
    Sep 27 11:02 AM
    "Paulson’s Plan Could be a Lose-Lose for the US Dollar"

    Kathy, is it possible that you're finally starting to get it?
    Reply
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