Treasury department action going forward
The new administration has three approaches they can use to make best use of the remaining TARP funds. The first, I mentioned in my last posting. The other two are promises for additional capital infusions or an offer to guarantee the value of some bank holdings.
The idea behind guaranteeing the value of bank holdings is to put a floor on asset values by offering insurance against future losses. The bank absorbs losses up to a point and then the government steps in to absorb further losses. With the steep drop in bank stocks, this approach might have the effect of reducing the fears of investors that the toxic loans on a bank’s books would put the bank out of business.
The other approach would have the government buying the common stock or warrants of banks. The previous strategy had the government buying preferred stock. Again, the reasoning involves increasing the bank’s capitalization, allowing them to absorb losses and increase investor confidence in purchasing bank stock.
For those of us who own bank stock, more power to this strategy.
Despite the benefits of these two options, most experts anticipate that the ‘bad bank’ approach is most likely. Others suggest that putting the damaged banks through bankruptcy proceedings’ would put the onus on creditors and not on taxpayers.
TARP2 expenditures
The announcement describing the use of the ‘TARP2’ funds will be made in the next couple of days. It will clarify the use of the second $350 billion and may include an announcement of the need for additional funds. Some predictions are that a substantial amount of additional funds will be required, and because of the publicity surrounding the $820 billion stimulus package, the announcement of another drain on taxpayer money will be delayed a day or two.
In an article from FoxNews.com, there are comments from Mark Zandi, chief economist at Moodyseconomy.com. He predicts that another $350 billion will be needed.
Many politicians would prefer to see lower mortgage rates and tax credits for homeowners as a component of any bills, beyond the bailout approach.
