Buddy, Can You Spare $25,000,000,000?
The US government’s ability to shock has apparently gone out the window. Yesterday, Hammerin’ Hank Paulson recanted on the central purpose of the Troubled Asset Recovery Plan (TARP): using $700bn (actually, up to an unlimited amount of money in theory, since the plan calls for $700bn to be held at any one time) to buy, well, ‘troubled assets’, as the name implies. The point, it seemed, was to take the bad stuff off banks’ balance sheets so they could regain the confidence of the markets and begin lending again, unburdened by stinky (and unpronounceable) toxic debt products. Paulson, just seven weeks ago, told Congress that ‘This troubled asset purchase program on its own is the single most effective thing we can do to help homeowners, the American people and stimulate our economy.’
In the interim, he appears to have changed his mind regarding the efficacy of the plan. Now, the Treasury Secretary says, buying bad assets is not the best way to fix the problem. Instead, the government should be bailing out the banks, and just about everybody else under the sun, by loaning them money and buying equity stakes in them. Never mind that several critics of the initial TARP proposal, including yours truly, thought that it was preposterous: the taxpayer would almost certainly participate in major losses incurred by the toxic debt, and without an equity stake, would not participate in any upside. Besides, how would you begin pricing assets that nobody wants?
Indeed, it turns out that Paulson was both smarter and dumber than it appeared when the TARP program was first floated. Dumber because the Treasury stuck to its guns insisting that it should buy troubled assets, but smarter because the wording of the plan left it wide open to reinterpretation. Which gets us to the latest proposal for what to do with the US$700bn bonanza. Now, the Treasury effectively plans to do what it pleases, with future measures likely to include loans to automakers, student loan companies, bank holding companies, and, well, nearly anyone else that qualifies as a ‘financial institution’. US$250bn has been earmarked for buying banking shares. Which, I suppose, may actually qualify under the spirit of the original proposal. For anyone who has been looking at shares like Citigroup plummet by one-third this week alone, could you reasonably deny that banking stocks are ‘troubled assets’?
So, before Paulson changes his mind again, and before the rules of the game get strict, the Watchdog would like to refer you to this website (it’s a PDF, so be warned). Yes, this is an application form for participation in the ‘TARP Capital Purchase Program’. In fairness, it’s not easy to qualify for this scheme: you’ve got to be an ‘eligible institution’ (bank holding company, S&L, etcetera) based in the US, which disqualifies the Watchdog on both counts. There are also some reasonably strict provisions for what the Treasury gets: senior preferred shares, and a nice dividend (9%) after the first five years. The maximum available is US$25bn, which, let’s face it, is not bad, even if it means the existing shareholders get diluted. Also, you’ve got to be quick, because the application deadline is November 14 at 5pm EST.
And for those who don’t conform to these particular rules, it looks like the TARP trough will be open for feeding for a while yet. Now that automakers appear to have qualified under the program (hey, GM’s too big to fail, and it offers customer financing!), the queue outside the Treasury is only going to get longer. How about Starbucks, for example. Sure, not your ordinary finance company. But they, too, may qualify as ‘too big to fail’ (I’m far more likely to buy a Frappuccino than a Ford), and they have been reporting some pretty dismal results of late. Plus, they sort of have a financing wing, in the form of those ubiquitous gift cards they have at the till. US$25bn with that double espresso? Has a nice ring to it.