Dow drops 400 on Paulson Turnabout
The TARP (Troubled Asset Relief Program) was part of the bailout bill. You may remember the one, that paultry $700B taxpayer dollars set aside to purchase troubled bank assets, or loan portfolios. All that changed today.
A lot of people were up in arms over the bailout; yet I have stood firm saying that if it works out as they laid out the plan to buy troubled loan portfolios, then the government will actually make money on those over time. In fact, simply changing the Mark-to-market laws would possibly have been sufficient to not require a bailout program at all. But, the bailout was passed, and the way it was presented the bailout still made sense. It would have been a profit for the Federal Government – over time – not a drain like it was portrayed.
All that changed this morning, when Treasury Secretary Paulson announced that the funds would not go to buy distressed mortgage assets after all. Rather, they would go to purchase stock in banks. It makes it very difficult to judge the effectiveness of a moving target. Some part of this experiment must be the control; otherwise it is tough to judge what is and is not effective. That’s one problem that I see.
At the same time, Fannie and Freddie are going to aggressively modify mortgages that are at least 90 days in default. And they will modify to make the debt-to-income ratio no greater than 38% of gross household income. And Paulson will encourage other banks to do the same or similar aggressive loan modification programs for borrowers in default.
No telling how this will play out for homeowners in need of some relief, and I am sure there will be other changes along the way. For now, it appears that Paulson has come up with a way to leverage the $700B to use many more taxpayer dollars for Fannie and Freddie to modify loans.
And tomorrow, it could all be different…
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