September 29, 2009

Economic Outlook: Frozen assets revisited

The program designed last October to remove frozen loans from the books of U.S. banks, appears poised to begin buying toxic assets, officials said.

In most of the 11 months since the Troubled Asset Relief Program was constructed by former Treasury Secretary Henry Paulson and pushed through Congress by a lame-duck administration, the $700 billion program has seemed to be everywhere at once, propping up banks, auto makers and insurance companies.

It wasn't an illusion. In July, SIGTARP, the Special Inspector General of the TARP program, noted: TARP, as originally envisioned in the fall of 2008, would have involved the purchase, management, and sale of up to $700 billion of 'toxic' assets, primarily troubled mortgages and mortgage-backed securities. That framework was soon shelved, however, and TARP funds are being used "¦ in connection with 12 separate programs "¦ that could reach nearly $3 trillion.

One way or another, that's real money. But now administration officials say a much delayed program to buy toxic assets should start soon, The Washington Post reported Thursday.

It is understood that fear and not much else kept the program in the shadows. Banks feared they would have to record huge losses on their books and they feared selling could mean giving up on future profits, presuming the market would eventually heat up.

The Treasury also had much to fear. In September 2009, policy makers are patting themselves on the back, but a year ago nobody was sure any of these programs would work, even ones with a $700 billion line of credit.

What scared Treasury officials as much as anything was the often repeated refrain that nobody knew what the toxic assets were worth. Some of the bundled derivatives are so complicated even the most respected policy makers throw up their hands trying to figure them out.

To their credit, Treasury officials, while scrambling to put together as many solutions as they could for a crumbling financial system, soundly knew one thing: They couldn't use billions in taxpayer funds to buy assets if they couldn't in clear language tell the taxpayers what they were and what they were worth.

So, what's changed? It is unlikely anyone can clearly explain how some of the complicated derivatives work. (Suffice it to say, if Rube Goldberg were a banker, he'd be the go-to guy in 2009.) But, the Treasury has found a system to dodge pricing the assets. The plan is to combine public and private funding, allowing private investors to do the valuations at auctions. The Treasury, meanwhile, takes a back seat, guaranteeing most of the losses, while providing matching dollars to give investors some healthy leverage.

U.S. markets slid Tuesday in advance of a consumer spending report and a final estimate of the second quarter gross domestic product due Wednesday. Automatic Data Processing Inc. also reports on monthly private sector job losses Wednesday.