Sentence First, Verdict Afterwards on TARP?

Maybe I am reading too much into this development, but the fact that Team Obama is planning to announce some TARP restrictions prior to revealing how the money will be doled out is really odd.

I welcome other views, but I can come up with only three theories:

1. The Administration is waking up to how unhappy the public is, and is parsing out the (supposed) pro-taxpayer measures first to appease voters

2. The Administration is worried that the stimulus bill could become hostage to the TARP, and is trying to be responsive to Congressional concerns

3. The whole process is dragging on and the Administration wants to be able to announce something this week so as to keep the markets from getting anxious that the Obama “fix the economy” initiatives aren’t getting bogged down (the “bad bank”idea may have hit a snag over pricing)

None of them seem a sufficient explanation for this plan. Any reader ideas or G2?

From Reuters:

The Obama administration is expected to first unveil rules for banks receiving U.S. government help, including clarifications on lending and restrictions on executive compensation, a source with knowledge of the government’s thinking said on Sunday.

Those rules are expected to be announced as early as this week and the administration’s plan to bolster the country’s banking industry is expected about a week later, the source said.

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  1. Steve

    Public rage at Wall St bonuses is now Obama’s problem. I predict they will do nothing more than loudly reiterate the existing restrictions on top executives. I also expect finely articulated hand waving on credit availability that won’t change aggregate lending. Why? Because too many underwater borrowers aren’t credit-worthy. Will the banks be lending to LBO firms that are about to collapse, taking lots of jobs with them? No. How about consumers with credit card balances equal to their yearly income? No. How about new mortgages for steeply depreciating commercial and residential properties, at oh say 95% LTV? No. Obama’s people are trying to suggest that credit is being withheld from `deserving’ borrowers. It’s not.

    Most financials got the original Tarp injections to forestall regulatory insolvency, and for no other reason.

  2. Steve


    #1 is the winner.

    obama made a special speech about it late in the week. though there will likely be nothing of substance to the their pay restrictions, obama and geithner know that taxpayers have begun paying more attention.

    i have had several IPs from come to my site to see the redneck bailout rant.

    so at a minimum it has been seen by the fed. and in case you never saw it, that guy was slightly angry.

    they are hearing us.

    45 links in one. Weekend blog roundup. Click my name.

  3. Anonymous

    Image management. Team Obama knows PR.

    We saw a similar trick in the great white north (Canada) ’round federal budget time. The ruling Party is/was in a position where it had to forsake strongly-held “truths” (positions it took in the election/ popular notions). Specifically, the Party had to tell the public that the treasury was in the red when the public had grown accustomed to “balanced” budgets. (compounding things, the Party won its fall election on a platform to the effect of “everything’s fine, the treasury is fine, we are finest!”) What a pickle!

    To soften the blow(s) of a (nearly) unprecedented deficit in the Cdn federal budget (not to mention near-total disavowal of all they “stood” for), the Party deigned to release in advance all the “good” news of the budget: help for workers! help for homeowners! help for munis! Stimulus today, not yesterday’s profligacy! Apparently, the apparatchiks thought this would divert attention from their electoral demagoguery when the budget came out.

    Unfortunately for the Party faithful, established practice in Canada is to seal the budget under lock and key until the day-of, so the Grand Strategy was pretty transparent.

    Perhaps Team Obama will succeed in softening the blow of their “plan” to “save” the banking sector. After all, we Canadians noticed because our Party broke with tradition. Obama has no convention hanging over his head here. So maybe the announcement detailing stated punitive conditions will distract voters from their actual coziness with the Masters of the Universe.

    But As Always,
    What the hell do I know?

  4. Anonymous

    Well he hasn’t done anything wrong yet. This is a thing he is doing right. The first thing to do is to crack down on banks’ bad behavior. Paying bonuses instead of lending must be punished.

    Then maybe more bank bailout, maybe not. This punishment doesn’t mean they deserve more TARP.

    Insurance hung up over pricing? That’s a great sign. It means someone doesn’t want to overpay for the toxic waste.

    I suspect that someone (Elizabeth Warren, for one) is looking out for our interests!

  5. Anonymous

    Looks like Obama is having his Kennedy moment, just after walking in the door and the oppositions proximity is much closer than Cuba.

    Where is McNamara, when you need statistically backed bombing, to pound the enemy into the ground or mutual assured destruction brinkmanship.

    Yes Ive said it, their playing for keepers on this one (the hole enchilada). Well see how much intestinal fortitude Obama’s camp has very soon or he may be allowed to live (peacefully) if he plays nice and does little to change the game, he may even get relected.


  6. Anonymous

    i vote #3. 10 days ago the chatter on the Street was that the comprehensive rescue package was getting tee’d up for this week. it was to include the bad bank, foreclosure prevention and also potentially an explicit guarantee of GSE debt and MBS, as well as whatever other goodies summers could think of.

    the fact that they are now saying that the package will hopefully be unveiled next week suggests to me the time line is slipping. of course, it’s entirely possible the reason things are getting bogged down is #1.

  7. the shadow risk

    We can’t buy all the toxic assets as they’re too big of a burden to put on the taxpayers. And the so called toxic assets partly depend on economic performance going forward, so they are hard to price. Setting TARP restrictions is necessary in order to separate assets that will be put in the bad bank later on.

  8. esb

    The answer is 3.

    What amazes me is that the tax evader now occupying the big chair over @ Treasury is such an incompetent market manipulator (when compared to the dear departed Paulson.)

    Paulson would have generated a couple of equity market moonshots in the period following the inaugural.

    Damn, he was a great con man.

  9. Anonymous

    I think that it is # 3 as well. This is not your normal game of chess. You need to position things so that when the crisis occurs the strategies and support for them are well coordinated and sold to the masses appropriately.

    It should be an interesting few weeks. There is so much to be done on so many fronts. A truly daunting situation for the strongest of leaders. I wouldn’t want to be in Obmam’s shoes and wish him and us luck. We do need to continue to speak out about the craziness so that we force less bad choices…

  10. Anonymous

    Option 1 due to option 3 seems the most likely to me, but if you are of the conspiracy theory type then you might want to consider the following.

    Option 4 = Give time for all the Bank executives to ship their money over seas.
    Option 5 = Give time for all the banks to register in Iceland instead.
    Option 6 = To tip off share holders of nationalisation so there is a run on bank shares and the cost will be less.
    Option 7 = To tip of hedge funds so that they can restore their capital by shorting banks.
    Option 8 = So Europe and China have time to set up their own protectionist response policies as a result.
    Option 9 = They want to see want happens when they start manipulating the mortgage market before they commit to how much they need.
    Option 10 = They want to see the market response to the announced measures before commiting to how much they need.

  11. Richard Kline

    My read: better visuals to help get Bad Bank floated offa da sandbar. When Plan A was a stinker over which the public is howling to its Congressfactors, it is at least hard to sail Plan A1 through the narrows. Particularly after Republicans sat out the stimulus, I suspect that Congressional Demos are feeling a bit, well, _naked_ on voting another Welfare to Bankers Act through.

  12. DoctoRx

    How about #1, #2, and #3 all being correct?

    They all are variants of: Public Relations.

    Team Obama has been embarrassed by a slow start.
    Remember the boast of having a stimulus package ready to sign on day 1?

    Then the new head of the head of IRS couldn’t get his taxes straight, it had to be revealed.

    Now the new head of Medicare, Mr. Daschle, not only couldn’t get his taxes right, but even when he supposedly did, he neglected his Medicare taxes (as discussed on my blog the past 2 days; you really could NOT make this up).

    So they need positive news when the headlines are bleak.

    So IMHO: All of the above.

    Keep up the great work, Yves.

  13. Broadsword

    I put together pieces of wood for a living, so take to anything I say economically with, what, a sharp chisel? It seems to me what motivates ‘The One’, is a lust for both power and adulation. (And I do mean lust, as in Seven Deadly sins flavor.) As ‘We the People’ have begun to see the ‘stimulus’ bill is in reality a ‘porkulus’ festival, his “mere words” about bonuses are him waving his other hand in the air to attract the attention of his angrier voters, and get his sycophants and acolytes in the press to repeat it. (A basic premise of the Democratic party is envy. “Look at those greedy guys. We’ll help you by hurting them, vote for us!!” It always seems to work. Charlie Brown, Lucy and the football.) Here the unspoken subtext is, “Look what those guys are doing with the money. Give me the power, and I’ll fix them.” I don’t think economics even crosses his mind. I’d like to know if what the porkulus bill want to buy is worth what he wants to spend to get it. Again, he’s buying power, Union membership, and therefore Union coffers. Why does he want/need any Republican votes?

  14. DownSouth

    Ah, what a great relief to see public opinion, or what Barry Sussman called “the great gorilla in the political jungle,” finally start to come to life. MIT professor W. Russell Neuman once expressed his belief that:

    What is important is that there are perhaps 5 percent (of the public) who are activists and news junkies who do pay close attention. If they see that something is seriously wrong in the country, they sound the alarm and then ordinary people start paying attention.

    The internet has certainly aided in “sounding the alarm.” And my cursory reading from cruising through cyberspace is that there is like ZERO support for the “cash for trash” exchange that Team Obama is proposing via TARP II and the creation of the “bad bank.” (Thank you very much, Yves, for doing your part, which by the way is not inconsequential.)

    So the “beast that must be kept calm” is posing some real problems for its handlers, the “engineers of consent”.

    Obama’s honeymoon may indeed prove to be a short one. In keeping with the neoclassical paradigm, he has surrounded himself with what Rienhold Neibuhr called “scientist-kings,” people like Geithner and Summers. As Neibuhr goes on to explain:

    The least that seems required is that the men of power should have social and psychological scientists at their elbows to prevent “irrational prejudices” from entering into their calculations and to persuade them not “to have their ears to the ground.”

    Translation: The gorilla is to be ignored.

    But alas, Obama doesn’t have the same claim to power as the kings of old. For his hold on power is not divine, but this-worldly. And if the “scientist-kings” are to prove their worth, they’ve got to bring the bacon home in the classical, Graeco-Roman tradition which they espouse–“the endless effort to change society for the better.” So it’s beginning to look more and more like the “scientist-kings” won’t be able to uphold their part of the bargain.

    Some will disparage science. Some will disdain economists as not true “scientists” at all, but as dabblers in the suburbs of Truth.

    But one things seems apparent: The great promise of science appears to be in for a very rough ride.

  15. recruiterrick

    I suspect it is all three, plus a few unmentioned variables.

    The banks are not hoarding the money given in bailout and TARP/EESA. What they have been, and are, doing with that money is using it, as per what little regulatory guidelines that were not gutted by our congressional folks, for the reserves of the assets they hold.

    From my article “Downgrading Tomorrow”;
    “Any publicly traded company or any fund used for investment must have reserves matching the risk represented in the securities they hold for investment. Bond issues (which all debt based derivatives are) rated AAA need very little capital to be held in reserve as a safety net should that bond issue go belly up. This is because anything rated AAA is assumed to have little or no risk of failing. As a bond issue loses its AAA rating, each downgrade significantly raises the amount of money needed to hold in reserve by the holder of that bond.’

    “In the 4th quarter of 2008, $2.3 Trillion more of these bonds were downgraded. So, the reserves needed rose, in some cases, dramatically. Please, do not think of this in terms of only the 4th quarter 2008. There have been a lot more before this, and there will be a dramatic amount after this.’

    “Guess where all that money from the “bailouts” is going. That’s right, almost every penny is going to the reserve accounts as these derivatives are downgraded. That money cannot be used to lend out, because it is already covering part of the loss in value of these derivatives.”

    Obama has quietly come to the realization that our financial system is, at the very least, about to radically change, and there is very little he can do.

    Probably all of the top 20 banks are technically insolvent. Some of them are so insolvent that, as a group, the national debt would need to be increased 6 -10 fold to keep them solvent. That is assuming we, as a nation, would want to do that, should level3 assets be cleared from their books.

    Obama is trying to buy some time, and hoping for divine intervention. Anything that may calm the markets, even momentarily, will be tried. At this point, our political leaders have nothing more to lose, except society as we know it.

  16. sk

    I think there is massive dissension within the ranks on what should be done and so you get delays, leaks and so on.

    Obama is being true to character – not leading but as per his record as State Senator, he’s voting:


    So it goes and so what’s new.


  17. ruetheday

    Bad Bank is, and will continue to be, a non-starter. The idea is great on paper. Then folks get around to calculating how much will really need to be spent to make it work (trillions rather than hundreds of billions, if the asset prices are to be high enough to actually save the banks) and quickly abandon the idea in favor of direct capital injections and insurance on asset losses. Then those ideas run into snags of their own (because they don’t fix the problem, they just temporarily make it seem not so bad). Then we’re back to Bad Bank/asset purchase schemes, and the cycle repeats.

  18. Waldo

    Why don't we cut him some slack at least initially. Sh*t, most of this was not his doing. We can eviscerate him when the really bad news happens (I think it will).

    Washington had very little praise when he was in the midst of the Revolution. His character (God listening) kept his leadership steadfast.

    Perhaps Obama's deep convictions will get God's ear. Lets Hope so.

    Up until Obama the Presidents (Clinton & Bush, Jr) were bidding what the Greatest Generation (Georg H.W. Bush, etc) were demanding. Obama is Gen. X (my cohort). Important generational change.

    Lets give him a chance.

  19. artichoke


    I had heard differently about where the bailout money is going. I heard that is going to pay off dollar-for-dollar obligations under CDS.

    Not even a haircut, paying 100% according to the terms of the contract. From taxpayer to CDS long.

  20. recruiterrick

    The dollar for dollar obligations on the CDS are for reserves also. As the bonds receive worse and worse ratings, the CDS payout climbs higher and higher.

    Remember, the CDS is a tool to recover losses within a particular Debt based derivative, like an insurance policy.

    The money is still going to reserve accounts to cover the losses of a CDO, CLO, CMO or the like. It is very complicated on how it is structured, and that was by design.

    We are arguing semantics, while my premise remains true.

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