August 12, 2009

Economic Outlook: Leverage lite

Investors were given two views of the Troubled Asset Relief Program this week, which a U.S. government panel said had sidestepped its primary target.

The Congressional oversight panel, led by Harvard Law School professor Elizabeth Warren, said the TARP program had failed to relieve banks of the toxic assets that were plaguing bank ledger sheets. Assembled last fall, when the nation's banks looked ready to fall like dominoes, the Treasury Department -- largely responsible for the plan -- redirected its efforts to buying stock, a quicker fix the Warren panel said helped stabilize the system.

But, the toxic assets just sat there. In uncharted territory, the Treasury was reluctant to place a value on the frozen assets. Banks were reluctant to part with them on the hopes they would rise in value eventually and on the fear that selling them would reflect poorly on their books, the New York Times reported Tuesday.

On the same day, Citigroup, a major beneficiary of the the TARP program, unveiled a report detailing what its $45 billion bailout had done for its customers.

The bank said it had loan commitments of $50.8 billion, certainly more than its TARP funding, but far less than what it could have lent if it felt ready to leverage the capital at historically average amounts. A fair figure for new loans might be $450 billion on a $45 billion aid package, the Times said.

Instead, Citigroup lent $7.8 billion less in the second quarter than it did in the first. It also set $22 billion aside to shore up losses, the Times reported.

In stock activity, U.S. indexes dropped Tuesday, forgoing the usual holding pattern that takes place as the Federal Reserve Open Market Committee heads into its two-day deliberations.

Few expect the Fed to change interest rates with Wednesday's announcement. In the morning, investors will have a look at June's U.S. trade balance report where May's gap of $25.9 billion is expected to increase.

Asian markets turned sharply lower Wednesday, the Nikkei 225 in Tokyo falling 1.42 percent. The Hang Seng index in Hong Kong dropped 3.03 percent, while the Singapore Straits Times fell 1 percent. The S&P/ASX in Australia rose 0.26 percent.

In midday trading in Britain, the FTSE 100 index gained 0.44 percent, while the DAX 30 in Germany rose 0.67 percent. The CAC 40 in France rose 0.51 percent, while the pan-European DJStoxx 600 rose 0.34 percent.