Take Goldman Sachs. Around the time of the TARP equity injection announcement, it was trading for about $120 per share. It is currently below $60.
That’s not as serious as some others. Citi’s current market cap is about $25.7 billion and they received $25 billion from TARP – so the TARP cash is 97% of their market value! They are not alone. Morgan Stanley’s market cap is $10.2 billion and they took $10 billion from TARP.
TARP has not worked – as implemented.
It is urgent that we move to a different strategy.
Secretary Paulson said November 20, 2008, in describing his leadership, that he needed to “be pragmatic enough to change plans when facts and conditions change.”
We need the Secretary of the Treasury to change direction on two key policies.
Those that read this column know that I have called for a two pronged approach to financial institutions: (1) mandatory equity injection into all good institutions and (2) purchase of troubled assets from viable financial institutions at fair market value.
We need both.
TARP was originally constituted to purchase troubled assets. That idea was nixed by Secretary Paulson in testimony to the House Financial Services Committee on November 18, 2008.
The problem is that the capital injections have little or no effect because the banks are still sitting on these highly illiquid assets.
To be clear, the reason that many banks are in a free fall is the uncertainty about the value of the troubled assets that they hold.
It is reasonable to assume that many of these banks are already insolvent (assets at current value are worth less than their liabilities).
Confidence and stability are not possible without mopping up some of these troubled assets.
Hence, we need another about face – quickly. We need to reconstitute the troubled asset purchases.
But there’s another about face that is necessary. The administration has indicated that it would hold the other $350 billion of TARP for the next administration.
This is a mistake.
The longer you delay deployment – the worse it will get, and it will be more costly to fix our economy.
On this point, President-elect Obama needs to be active. It is a mistake to let the situation deteriorate until the transition on January 20, 2009. The downside risk is that we fall so deep that the new president will not be able to fix things in his first three years.
Is $350 Billion Enough?
On October 3, when the TARP was passed, it might have been enough. It isn’t right now. Here I agree with the Treasury Secretary that there is not enough funding to deal with all the troubled assets. However, that does not mean we should throw in the towel and wait until January 20, 2009
To make things worse, we are paralyzed by the political limbo that will last till mid-January. We can’t afford to wait that long.
Is There a Solution?
The Federal Reserve. Chairman Bernanke has been very proactive and has made many innovative moves that have prevented us from falling deeper into the abyss.
The Fed has the ability to step up and outright buy some of these troubled assets. In an ideal world, they would not have to do this. But this is hardly ideal.
What Needs to be Done
1) Use the remaining $350 billion now to remove problem assets from financial institutions’ balance sheets
2) Allocate the rest of the first tranche to capital injections in a wider range of good banks (small and medium sized banks)
3) Fed starts to buy troubled assets on its own