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November 12, 2008

US Government Won't Be Buying "Toxic Mortgage Assets" After All

Remember when buying bad mortgages was the reason we had to pony up $700,000,000,000? Apparently that rationale is no longer operative.

Treasury is unlikely to conduct any auctions to purchase bad loans and other troubled assets -- the original intention of the $700 billion rescue plan. Instead, Treasury is expected to continue focusing its firepower on injecting capital directly into the financial sector, these people said.

"Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources, in helping to strengthen our financial system and support lending," (Treasury Secretary Henry Paulson) said, according to his prepared remarks.

House Financial Services Chairman Barney Frank (D., Mass.) said that Treasury disagreed with the plan to put asset purchases on hold. "We have a need to use that funding" for that purpose, Mr. Frank said at a hearing on Capitol Hill. Mr. Frank noted that Congress gave Treasury explicit authority to buy up mortgage-backed securities and whole mortgage loans as part of TARP.

Treasury has just $60 billion 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 billion. Treasury has so far committed $250 billion to banks and is spending an additional $40 billion to buy preferred shares in American International Group Inc., the big insurer.

Instead of buying the mortgages, Treasury wants to inject more capital into banks, perhaps with a matching requirement of private equity.

I have to admit that I supported the bailout on the logic of buying up the mortgages and freeing the credit markets up. Now, I have no idea what they are doing. On the up or downside (depending on how you look at it), it doesn't look like Paulson or anyone else has a clue about what they are talking about either.

Update [Slublog] - DrewM was nice enough to let me add on to this post. This might not be an entirely bad plan, at least the part that requires private banks to raise some of their own capital. Greg Mankiw, the former Chairman of President Bush's Council of Economic Advisers suggested something along these lines last month. If implemented correctly, such an approach would give more power to private firms over the government.


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posted by DrewM. at 12:42 PM

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