Whoops! Back to TARP after all…

The government is looking to buy substantial amount of assets from Citi
like a good bank, bad bank structure. The Government will absorb much
of the losses for Citi if there are losses and Citi would issue
preferred stock to the government. The government could buy more than
$100 billion in the bad assets if the plans go through.

Here is more.  Didn’t Paulson tell us just a few days ago that TARP wasn’t needed after all?

Doesn’t this mean that Paulson should speak less frequently?

And yes, we do now have the Paulson plan and the Dodd plan all rolled into one.  And as CalculatedRisk noted:

Hey, I thought Citi WAS the bad bank!

Addendum: Read this lovely update!

Comments

My prediction? -when this is all over and the final accounting of costs and benefits is made, those (including myself) who said the government should do nothing will be proven to have been right.

If CalculatedRisk is correct, then the proposed Citi-Wachovia deal structure was as I suspected. It was a hidden bailout of Citigroup.

chsw

This has to be stopped. Paulson needs to be placed under citizen's arrest.

I wish those who are so vocal about Obama's incipient evil tax plans would spend equal time and energy decrying the egregiousness of Paulson's actions, which in my opinion are far more dangerous.

Like anonymous poster #1 (please pick a name and save it, btw), I have been against bailouts of any sort since day 1 - and I work on Wall Street.

To this casual observer, it would appear that the the original TARP (troubled asset purchases) was a better plan that the reformed TARP (equity injections), at least from the point of view of un-freezing the credit markets. The passage of the orignal TARP appeared to bring relief to those markets, but they re-siezed soon after Paulson announced the reformed TARP.

I don't think this chronology is quite right. Markets fell when the first proposed bill died in Congress. Then the day after the modified bill passed, markets again fell. Whether this was due to the perception that buying "distressed assets" was not enough, or something else entirely, it's not clear. The "reformed TARP" that you are speaking of is something that was announced only several days after the passage of the bill, though.

But if the problem is that, out of 1000s of financial firms, 100 unknown firms might fail because of junk assets, and no one knows which of the 1000s those 100 firms are, then counter-parties won't want to do business with any of those 1000s, out of fear they might be one of the 100. To solve this problem, the governemnt would have to inject enough equity in all of the 1000s of firms to cover any pontential losses due to junk assets that counterparties might imagine. Obviously, the government doesn't have enough money or time to do this. To deal with this second kind of problem, a better tactic is to remove the junk assets that the market fears, i.e. the original TARP.

This doesn't change the scale of the problem. For government purchases of assets to have a real impact the government would have to pay more than the going market rate for these assets which, as Krugman and others have pointed out, is a backdoor way of injecting equity, although without the government getting shareholder votes. And we are past the point where arguments about banks only having liquidity problems apply. Banks are edging towards insolvency; if they sell their "toxic" assets to the government, that doesn't change their balance sheets one bit.

This is insane.
Citi too big to fail? Break it up then!!!

Ricardo: I should add that it is possible to deal with the deal with the justice issue you brought up within the asset-purchase framework. If the government pays face value for the toxic assets, it could require that the selling firm grant it an equity stake. As long as the value of that stake is (slightly) less than the difference between the face and market value of the toxic assets, the firms holding the toxic assets will still sell because they wills still come out (slightly) ahead.

I really don't care one way or the other, because, from my perspective, we aren't doing this to help the firms holding the toxic assets. We are doing this to be able to help all the other firms out there that fear contamination, without having to open up the national checkbook and pay them all as well.

Is it realistic?

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