Is Bailout Now Better For Taxpayers?
What happens when TARP is no longer TARP?
The $700 billion Wall Street rescue/bailout plan is called TARP, which stands for Troubled Asset Relief Program.
Except, thanks to Treasury Secretary Hank Paulson's speech today, there's no longer any "TA" in "TARP."
Paulson said today that the plan to spend taxpayer money to buy toxic assets -- such as mortgage-backed securities -- from troubled financial institutions as a way of improving their balance sheets is dead.
Instead, Paulson said, the government will continue doing what it's done from the start: Using the bailout money to buy direct stakes in banks, insurance companies and who knows what next, partially nationalizing the institutions.
It's important to note: This is not the plan Congress approved and the President signed into law. They agreed to what Paulson pitched -- buying toxic assets -- not allowing the government to buy stakes in private institutions.
But Paulson said today that the economy turned so bad so quickly, he realized his original plan would be ineffective almost as quickly as it was approved.
"I will never apologize for changing an approach or a strategy when the facts change," Paulson said.
But here's the big question for you, the taxpayer: Paulson, and Fed Chairman Ben Bernanke, sold the TARP to Congress -- and Congress sold it to you -- by saying that you, the taxpayer, most likely would actually make money on this deal.
Here's how it was supposed to work: The $700 billion would be used to buy the toxic assets, which have almost no value today because there's no market for them -- no one wants to buy them. But presumably, when the economy recovers, these toxic assets would recoup some of their value and the government could sell them back into the private sector at a profit. Bingo -- you, the taxpayer, make a profit.
Now, Paulson is saying, the government is going to continue to use your money to buy stakes in companies. In essence, the government is picking where to invest your money without asking you. The government will be buying preferred shares in the company, which generally have a higher value.
So we turned to our go-to guys at Alexandria's Motley Fool -- Tim Hanson and Bill Mann -- and asked them this question: Which was a better investment for taxpayer money: buying toxic assets or investing in companies?
"I think it’s more likely that the taxpayer can actually make money on this deal if the government buys up preferred shares in financial institutions at today’s prices," Hanson wrote in an e-mail to us today. "After all, when Warren Buffett invested a few weeks ago, did he buy toxic assets from Goldman Sachs or did he buy Goldman preferred shares? He bought the preferred shares, which I think speaks volumes about where you want to be if you want to make money.
"Valuation matters, of course, but I think the government can pay market price for stock in good conscience (it serves both taxpayers and the institutions) in a way that they could not by buying assets directly," Hanson said, but then cautioned: "By leaving the [toxic] assets on the books, however, there is still a potential for write-downs that could impair the value of these firms, but I personally think this is the better way forward."
Mann largely agreed, writing in an e-mail: "I'll have to hedge that answer a little. I think the significance of the change comes from the fact that this is an investment that [has many variables], rather than the straight-line proposition of 'Are we buying garbage or not?,' " which would have been the case had the government gone ahead with its plan to buy toxic assets.
He added: "I think on a risk-adjusted basis this is a better deal as it increases the likelihood of a positive or neutral return, but it reduced the chance that the taxpayers will make a lot of money. On the balance, since it isn't cool to speculate with taxpayer money, yes, I think it's a better conceived program with a higher potential risk adjusted return."
One other point: Now that there are no longer any Troubled Assets in TARP, what should TARP be called?
CNBC asked viewers this question today and got several humorous answers:
-- USURP: U.S. Universal Recovery Plan.
-- TWERP: Troubled Wall Street Executive Retirement Plan.
-- TARP: Troubled Asset Relocation Program.
-- IMBECILE: Indiscriminate Bailout Exclusive of Clear Intelligent Leadership and Execution.
-- BARF: Bad Advice Ruining Finances.
-- Frank Ahrens
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Posted by: jbauda | November 12, 2008 3:14 PM | Report abuse
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