Wikinvest Wire

Elizabeth Warren on the TARP Program

Thursday, April 09, 2009

Elizabeth Warren talks about the Congressional Oversight Panel's report on the TARP Program, now six months old.


Recall that this was in the news recently, Bloomberg filing this report with headlines about firing some executives and liquidating a few of the problem banks.

Some key excerpts from the report about valuing assets:
One key assumption that underlies Treasury’s approach is its belief that the system-wide deleveraging resulting from the decline in asset values, leading to an accompanying drop in net wealth across the country, is in large part the product of temporary liquidity constraints resulting from nonfunctioning markets for troubled assets. The debate turns on whether current prices, particularly for mortgage-related assets, reflect fundamental values or whether prices are artificially depressed by a liquidity discount due to frozen markets – or some combination of the two.

If its assumptions are correct, Treasury’s current approach may prove a reasonable response to the current crisis. Current prices may, in fact, prove not to be explainable without the liquidity factor. Even in areas of the country where home prices have declined precipitously, the collateral behind mortgage-related assets still retains substantial value. In a liquid market, even under-collateralized assets should not be trading at pennies on the dollar. Prices are being partially subjected to a downward self-reinforcing cycle. It is this notion of a liquidity discount that supports the potential of future gain for taxpayers and makes transactions under the CAP and the PPIP viable mechanisms for recovery of asset values while recouping a gain for taxpayers.

On the other hand, it is possible that Treasury’s approach fails to acknowledge the depth of the current downturn and the degree to which the low valuation of troubled assets accurately reflects their worth. The actions undertaken by Treasury, the Federal Reserve Board and the FDIC are unprecedented. But if the economic crisis is deeper than anticipated, it is possible that Treasury will need to take very different actions in order to restore financial stability.

By offering this assessment of Treasury’s current approach and identifying alternative strategies taken in the past, the Panel hopes to assist Congress and Treasury officials in weighing the available options as the nation grapples with the worst financial crisis it has faced since the Great Depression.

5 comments:

getyourselfconnected said...

Tim,
I wanted your take on something that happened while talking about gold with a "market connected guy" I know:
He said Gold was a loser in deflation, I argued it held it ground in deflation, maybe not a killer, but held its ground.
He said, so if we have deflation, you will be right where you are now?
I said: That is pretty good in deflation!
He said: you know the FED/Treasury will succeed in reflating?
I said: and then gold will do VERY well!
He said: you cant have it both ways!

I think gold is good in deflation (you stay intact) and great in inflation (you make headway). Its not electric, its not eye popping, but gold is solid. Any thoughts? Can one investment protect you in either case?

Tim said...

Good in deflation, great in inflation and the good in deflation might be great in relative terms.

getyourselfconnected said...

Thanks Tim, I really do no think it is an argument that "changes to fit the scenario". Either you get gold or you do not.
One problem with dealing with folks who can only understand back to 1998 is the rich and deep history of gold through so many times of (insert here). Not 100% of your portfolio, but a great part of any investment strategy.
Thanks for the quick response.

Dan said...

If gold is a, "hedge against uncertainty", and both deflation and inflation create uncertainty...

Fish Gone Bad said...

Elizabeth Warren is apparently clueless about the TARP money. The money went to fix a run on the banks as per the St. Louis Fed's page:
http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s[1][id]=MULT&s[1][range]=5yrs

Rep. Paul Kanjorski of Pennsylvania was on YouTube talking about it as well:
http://www.marketoracle.co.uk/Article8805.html

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