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Welcome to no-man’s land. The Troubled Asset Relief Programme lands Hank Paulson and America’s taxpayers squarely between sellers and buyers of US property loans and mortgage-backed securities in their enduring stand-off. Once armed with up to $700bn to hoover up assets from the banking system, the question is what the Tarp will cover – and how?
Paulson’s plans leave wiggle-room enough for an M1 Abrams tank. But then this is a sizable weapon. The suggested purchasing power represents a decent chunk of some $9,000bn of non-agency residential and commercial mortgages. It will be pricey. Estimates for the cost of this crisis reach 7 per cent of GDP, with the prospect of a $1,000bn federal deficit next year.
The real strategic quandary is how to set prices for a baffling range of hard-to-shift assets. With lower return requirements and funding costs, the Treasury could offer more than other potential buyers while guarding against economic losses. A reverse auction seems neat. Taking the lowest price from sellers of a given asset type should aid taxpayer protection. But the banks would, presumably, first seek to shift the dregs of their portfolios. Ensuring fair and independent bids may prove challenging. More importantly, the method would benefit those who have already written off assets aggressively. And a government-approved price could mean further writedowns and capital erosion even for institutions choosing not to participate.
Buying assets at their carrying value in the banks’ books is likely to be politically indefensible in what is already threatening to become a congressional dogfight. Any claw-back mechanism for losses extends the uncertainty that the Treasury aims to relieve. Politically appealing conditions, such as limits on executive pay or forced easing of mortgage terms, could deter use or create further losses in the banking system. Either way, the management of purchased assets, through government-directed funds, suggests an unhappy mish-mash of value maximisation and social-policy goals. Another expanse of uncharted territory between opposing forces.
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