News&Notes: TARP Update

Treasury considers private role in TARP - WSJ
The Wall Street Journal reports the Treasury Dept, signaling a new phase in its $700 bln financial rescue plan, is considering requiring that firms seeking future govt money raise private capital in order to qualify for public assistance, according to people familiar with the matter. The move is not expected to apply to the existing $250 bln capital-purchase program, which is already injecting money into banks. But Treasury is considering attaching such conditions to any of its future capital investments, these people said. At the same time, the Treasury is unlikely to conduct any auctions to purchase bad loans and other troubled assets -- the original intention of the $700 bln rescue plan. Instead, the Treasury is expected to continue focusing its firepower on injecting capital directly into the financial sector, these people said. Treasury Secretary Henry Paulson may outline some of these changes Wednesday, when he provides an update on TARP. Treasury has just $60 bln left in its rescue fund, and either the current or next administration will have to turn to Congress to request the second half of the promised $700 bln. In another step, U.S. bank regulators could announce guidelines this week designed to encourage U.S. banks to remain active lenders as financial mkts are squeezed. Many U.S. cos and individuals have become dependent on bank credit lines as financial mkts have tightened up. The regulatory guidelines could also address sensitive issues of bank dividend payments and executive pay.

RCM Comments: Take aways from this story:

1) "requiring that firms seeking future govt money raise private capital in order to qualify for public assistance" This development is long term good short term trouble. On the plus side, this will ensure only real viable companies will get funding from the government. The private sector is a much better judge of viability. However, on the troublesome side, this will create a constant increase in supply of equity and/or debt at a time when demand has collapsed.
2)"Treasury is unlikely to conduct any auctions to purchase bad loans and other troubled assets
-- the original intention of the $700 bln rescue plan" The bait and switch continues. The debate is over, Paulson & Co. clearly lied to congress in order to get funding. The pitch to congress for money sounds better if Hank says bad loans will be purchased. In a vague way that seems to help the average voter. On the other hand, asking congress for money to inject into the financial sector seems to help Wall St..
3)"Treasury has just $60 bln left in its rescue fund, and either the current or next administration will have to turn to Congress to request the second half of the promised $700 bln." Let the games begin! I imagine Paulson & Co. will have a much harder time getting the release on the rest of the rescue package. The bait and switch only works so many times, eventually the loser gets wise. How will this effect the equity markets? Well, if we think about the action during the 1st bailout debate we will remember a very weak market. It is not in the best interest of the PPT (please see the mission statement for an explanation of PPT) to support the markets while the debate is on going. Best to have the markets suffer so Paulson and Co. can scare the silly congressmen into agreement. This tactic is even more important now because Paulson & Co. have lost a major weapon. The 1st debate happened before the election. Ask yourself, what congressman would want to appear unhelpful to the American public and vote against a bailout right before an election? Paulson & Co. have lost the time sensitive leverage of the looming election. At the very least, this lack of urgency should drag out the bailout debate and cause more uncertainty, something the markets hate.