The Troubled Asset Relief Program (TARP), which forms part of the Economic Stabilization Act of 2008, was a major focus at the Information Management Network's 14th Annual ABS East conference held in Hollywood, Florida, last week.
Panelists at the gathering's TARP panel acknowledged the positive points of the government program, although expressed some concern over the effectiveness of its implementation.
On the upside, participants said that the effects of government efforts to loosen the credit markets, including TARP, have pushed interbank lending to restart, an event reflected by the drop in three-month Libor rates. "The government has worked to stabilize the banking system," a panelist said.
However, some of the panelists last week said they believe that TARP could create systemic risk. For one, it would be difficult to apply Federal guarantees on the disparate instruments that the program is supposed to cover. "Who are going to back these? Who is responsible for the servicing on these loans or the obligations left when these people don't have to pay for their loans?" a panelist said. "Given the nature of the election year, there's little that could be done about placing accountability throughout the system. We are in scary territory."
One problem with the current version of the TARP, according to panelists, is that its goal has been changed from only providing capital to financial institutions to helping restart communities. "Was it meant to stabilize the banking system or to try to stop foreclosures?" a panelist asked.
Promoting market stability and preventing foreclosures might not go hand in hand. For instance, if the government buys assets at the lowest possible price, this does not necessarily help the homeowner.
Also, the incentives given to banks that participate might not be enough. "TARP is like the largest new hedge fund that has a two-year lock up," said a panelist. Financial institutions, the panelist believes, wouldn't want to be a part of a program that requires the surrender of 20% of their stock and to be paid significantly less for it.
Panelists said the government should stay away from any type of blanket implementation and treat TARP "as a forensic exercise." As another panelist said, "This is not a homogenous market."
Pricing for the loans is also going to be a problem - should there be bids for these securities or should the buying be based on intrinsic value.
"These could be priced based on the worst case scenario plus 10 basis points," a participant said.
The speakers also brought up the possibility of the government holding a reverse auction with the appropriated amount of assets that it wants to cover.
Another alternative that was mentioned as a way for the government to restart the MBS market was to buy whole loans, modify them, repackage them and then sell them as securities after allowing these to season for a couple of years. However, the problem with this is it creates a whole different sector that players can invest in so "what then happens to pre-existing markets," asked a panelist.
Whatever the solutions or avenues open to the government for implementing TARP, currently, there are more questions than answers.
"It's pretty complex, it might have been better if the government just spent time recapitalizing the banks and the rest of the time preventing foreclosures," a panelist said.
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