Friday, October 17, 2008

The Rise and Fall of a TARP


Price is everything. The price that the Treasury ends up paying for TARP assets could get ... politicized.

Assume they decide to actually take action on defaults, rather than just ... bail out lenders.

They have authority to modify loan terms, once they own them. Assume they know what terms they want to offer. That suggests the price that they should bid for assets, for pools of sub-prime securities and alt-a loans (or perhaps even structured assets built up on those pools).

That price could get "political", because they will be under pressure to offer better terms to lenders, from ... the lender-lobby, let's say.

If they think they are going to pay a lot more to get ownership, and then write-them down to some set of modified terms at taxpayer expense, then someone is going to see through that, fast, and raise a stink.

Of course, the TARP is constrained to buy asset pools, not individual loans, which is inefficient for targeting loans that you would want to restructure immediately. Put another way, if there are 20% default rates, say, you end up buying 8 mortgages that you have to buy up for every 2 that you want to address immediately.

To me, this is a serious inefficiency, if your target is to actually want to do something about smoothing the adjustment in the real-asset markets that need to clear, i.e. the residential housing markets that are 'underwater' on price and debt.

To be fair, "working retail" (as I've suggested in my own musing / approach) is a hurdle too, as there are millions of defaults and near defaults that the government would have to offer terms on.

Nevertheless, I think that creative ways to address that might be uncovered, like working with the servicing agents to get the work done that the government needs. It has to be at least as easy to contract that help and it's a LOT less risky, politically and otherwise, because the whole thing is simple and easy for the public to understand.

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