TARP not going for TARP

According to an AP story:

Treasury Secretary Henry Paulson says that the $700 billion government rescue program will not be used to purchase troubled assets as originally planned.

Paulson says the administration will continue to use $250 billion of the program to purchase stock in banks as a way to bolster their balance sheets and encourage them to resume more normal lending.

Talk about a complete 180. And a wrong shift at that. As said earlier, Do everything:

That means government guarantees and unsecured central bank lending to unlock the credit markets, recapilization of the banks with a direct infusion of funds and pulling the bad assets off the books through a TARP mechanism. (emphasis added)

There is still a need to pull those bad assets off the books -- other than by suspending mark-to-market rules which would have the affect of simply hiding the bad assets not removing them.

Remember that Congress only authorized a portion of the TARP funding. I hope Congress will be asking some tough questions on this complete change of course when the Secretary comes back before it to ask for the next installment.

UPDATE: According to a story in the New York Times about the Paulson press conference, the Secretary state that some of the funds would go to prevent foreclosures. I would support that action. However as the story (Paulson Says Treasury Is Shifting Focus of Bailout) notes:

A proposal to have part of the bailout funds used to guarantee mortgages that have been reworked to reduce monthly payments for borrowers is an approach the administration continues to discuss, but Mr. Paulson did not announce that it would be adopted. The chairwoman of the Federal Deposit Insurance Corporation, Sheila Bair, has pushed for that approach.

So it remains to be seen what exactly the Secretary has in mind.

While unclear on that point, the Secretary's announcement does add some clarity for another part of the market. The Financial Times ran a story this morning -- Confusion as Tarp fails to ease clogged markets -- that noted:

Indeed, according to many financial market participants, uncertainty as to whether the government will still implement the original plans of the Tarp to buy distressed assets is making the market worse. They say there has been virtually no trading, as investors wanting to sell are reluctant to do so as long as they think the government may soon step in at a higher price.

“Tarp was supposed to be good for the market, but the lack of clarity and the lack of decision-making has been a problem,” said Thomas Hamilton, head of asset-backed securities at Barclays Capital. He emphasised the Treasury had to decide something, especially as financial institutions near their financial year-end.

Well, Treasury has decided -- and we will see what happens.

UPDATE 2:

Is the reason why Treasury is abandoning the purchase of troubled assets because of the risk of getting the price wrong? As the Wall Street Journal notes in its story Treasury Not Planning to Buy Bad Loans, Assets:

Figuring out how to purchase assets has proved tricky, in large part because it's difficult to determine how to price such assets, many of which are backed by risky mortgages and carry depressed values. Buying them at market prices would further hurt banks, since the firms would have to write down the value of those assets. But paying above-market prices could potentially hurt taxpayers if the assets never recover in price.

But isn't that exactly the point? Doesn't someone needs to play the role of market maker and set the price? I seems to me that the government the only one who can play that role right now -- it is even beyond Warren Buffett (channeling JP Morgan).

Or maybe this part of the action has shift over to the Fed. According to the Journal:

On Monday, Treasury and Federal Reserve officials held a phone briefing with Capitol Hill staffers about the government's revised rescue of AIG. While Treasury will buy $40 billion in preferred AIG stock, the Fed will use $50 billion to purchase distressed assets from the company. On the call, Hill staffers asked why the Fed was buying the assets instead of Treasury. Fed staffers said the structure will help insulate taxpayers, according to someone familiar with the call.

Interesting.

Also, for what the Secretary actually said see Remarks by Secretary Henry M. Paulson, Jr. on Financial Rescue Package and Economic Update.