Paulson to launch TARP 4.0 to buy consumer-loan backed securities

Posted Nov 25th 2008 8:30AM by Peter Cohan
Filed under: Citigroup Inc. (C), Economic Data, Housing, Financial Crisis

Can someone please stop Hank Paulson from wasting more taxpayer money? Steve Forbes -- a failed 2000 presidential candidate I met a few weeks after 9/11 -- has called Paulson the worst Treasury Secretary in modern times. Now, Paulson wants to launch the fourth reincarnation of the Troubled Asset Recovery Plan (TARP) by buying securities consisting of bundles of consumer loans. In his effort to appear to be helping consumers, he is simply launching another failed Wall Street bailout.

Here's how I view the four reincarnations of TARP:

TARP 1.0 was to take $700 billion to buy toxic waste from Wall Street in reverse auctions. As Paulson said, America needed to pass this plan to avoid heavenly retribution. But the plan was DOA for reasons I posted about here.
TARP 2.0 involved buying equity stakes in banks -- the U.S. spent $159 billion for preferred shares in 24 banks. But the banks are holding onto the money and not lending it out. Perhaps they'll use it to pay $26.6 billion worth of bonuses. That's rich -- using taxpayer money to help out the people who got us into this mess.
TARP 3.0 was the plan to cover losses on $277 billion worth of Citigroup 's (NYSE: C) toxic waste while using $20 billion in cash to buy $27 billion worth of preferred stock yielding 8% along with warrants on 254 million shares at $10.61. Expect more of these deals as Citi competitors complain of a tilted playing field and Paulson scrambles to accommodate them. But with Citi, the U.S. protected Prince Alwaleed's common shares, other banks might not be so lucky.

TARP 4.0 is going to be announced at 10 this morning. It will spend between $25 billion and $100 billion of taxpayer funds to buy securities consisting of bundles of automobile, college, and credit card loans. This idea could certainly make things worse since it's securitization that helped get us into this mess in the first place.

If Paulson really wants to help consumers, he could just buy cratering car, college, and credit card loans from banks directly. But his mind has been warped to think that the only way to help anyone in society is to use government money to increase Wall Street's profits.

If anything that Paulson had done actually worked, then I might be thinking that he was being flexible and creative. But it looks to me like he is really flailing and failing instead.

Someone needs to pull the TARP out from under him.

Update. This morning, Treasury announced that TARP 4.0 is the Term Asset-Backed Securities Loan Facility (TALF) -- a much bigger than expected $200 billion lending fund for holders of AAA rated securitizations backed by newly and recently originated consumer and small business loans. Based on the AAA ratings of securities that turned out to be highly risky, hold onto your wallet!

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup securities.

Tags: banks, economy, featured, henry paulson, HenryPaulson, Paulson, steve forbes, SteveForbes, TARP, wall street, WallStreet

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Reader Comments (Page 1 of 1)

11-25-2008 @ 8:52AM

lou said...

Paulson is hip-deep in this whole farce. Before he became treasury secretary he was involved in this scandal. He promoted it and got rich from it. He is simply shoring up his own portfolio so to speak and trying to cover up his sordid past. The man should be investigated and prosecuted for any fraud he has committed. After Obama gets in office, so he can't be pardoned by GWB.

11-25-2008 @ 9:45AM

Lawrence said...

It might be more helpful if Congress would pass laws limiting credit card interest rates and fees to something more reasonable..... Somehow those bankers haven't yet realized that they will have a better chance for the return OF their money if they quit soaking the consumers for more return ON their money......... Having interest rates that are 70-80% of one's minimum monthly payment, and/or raising the minimum monthly payment, will make more consumers just throw in the towel and declare bankruptcy.......

Bank subsidies from taxpayer money should ultimately benefit the TAXPAYERS!

11-25-2008 @ 9:56AM

BHarrison said...

Let us NEVER FORGET that Paulson HAS been one of those EXORBITANTLY OVER PAID and OVER COMPENSATED CEOs . . . he is a fox who has been put in charge of cleaning up the hen house slaugher.

The man's rather perverse and distorted perspective certainly is NOT what we need in a 'REFORMER". Paulson has too close of a vested interests with the other CEOs of major coporations . . . there is a blatant ABSURDITY to Paulson leading this reform. (He certainly is NOT going to address the excesses of the processes that he earned his wealth from.

The man can only have a biased and slanted perspective.

11-25-2008 @ 10:10AM

Manon Sergerie said...

It is the second time that someone mention to lower interest rates. I think that the interest rates should be 6% across the board, credit cards, loans, mortgages, student loans, home equity loans etc.....

11-25-2008 @ 12:06PM

j. howard said...

I still don't understand why we don't simply give 700 billion dollars directly to the taxpayers that gave the money to the IRS to begin with. Estimates are that there are about 100 mil. taxpayers in the U.S. That's 7 million per taxpayer. There would be no more home loans to pay off. Unemployment would be nonexistence because these people would either spend the money or create new businesses. Plus, all those unemployed non-taxpayers could now reap the employment oppurtunities and start paying taxes, increasing the tax base.
Too simple? you tell me.

11-25-2008 @ 2:50PM

Barry Summerlin said...

Not a math major, were you, J Howard?

11-25-2008 @ 4:23PM

adam hartung said...

Fed spending $100B to buy loans isn't much different than if the government spent $100B to buy SUVs off the dealer lots. These investments are not helping America, and its companies, become more competitive. We need to focus our assistance on moving forward with new business models that enhance competitiveness so companies can succeed in global markets. Read more at http://www.ThePhoenixPrinciple.com

11-25-2008 @ 3:51PM

bill said...

definately not a math major, probably never got past the 3 years he spent in 3rd grade.

11-26-2008 @ 3:37AM

j said...

Paulson is a joke. He should just quit.

WHen I was little they had a word for what banks now charge on interest for loans. It was called usery and was a crime.

Who needs loan sharks and the mob when we now have banks.

All this credit being made available for the general public.
I have been working hard for over a year to improve my credit score. I've been paying off my credit cards (they are almost all gone) and loans but to no avail. The credit card companies are now cutting back my credit limits what was down to 20% of my limit is now being brought down so much and so fast that it doesn't help my credit scores at all.
I would have been better off paying the minimum and putting the money in my mattress.

And the Republicans want to stop what Obama is going to do- why because it's not their guy or their idea. America is watching and the republican party doesn't have a clue.

Jan. 20 can't come fast enough.
(and I did not vote for Obama)