who is responsible, page-38

i wrote this at 2am thursday....

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The TARP Bill - or how to pay-off unhappy customers



The passing into law of the recent TARP Bill (or Troubled Assets Relief Program) by the USA will prove to be yet another of the Bush Administration’s exercises in telling stories – last time the respected Colin Powell was used as the front-man, this time it was the experienced finance veteran Hank Paulson.



Section 9 of the Bill which defines a ‘Troubled Asset’ enables Treasury to buy any mortgage security which ‘promotes financial market stability’ – and here is the kicker – including any ‘toxic’ securities (a spin term picked-up by their media) held in abundance by foreign investors and banks – like the Bank of China and the Bank of Japan – the two largest external holders of distressed US securities – are you starting to see where this is going?



There is transparency under TARP, however not enough to reveal whether overseas holders of US junk securities are selling those same securities to Goldman Sachs, who in turn will sell them to the US Treasury – in other words the Bank of China (and other unhappy overseas holders) can now effectively sell back these useless securities to the US Treasury beneath the radar of public scrutiny.



Paulson made it quite clear when lobbying for the Bill that Bush would veto the Bill if it contained provisions preventing offshore parties selling back toxic securities – securities that have become worthless – securities that make customers of the USA very unhappy – thus Section 9 was left broadly stated, ill-defined and loaded-up with plenty of discretion to be used by Paulson and his Treasury officials when buying these securities.



So now overseas investors and banks can and will largely benefit and take a large slice of the US$700 billion, meaning that a great part of the US$700 billion will not stay within America, meaning that it will not go to alleviate Main St hardship as it was so passionately said (read spin) it would – those many millions of US citizens and small businesses used by politicians to justify the Bill’s being passed.



The funny irony about all this is the fact that Wall St understood that the second Bill (after the first failed to pass) was not going to insure that the US$700 billion was going to stay in America, and they weren’t happy about it either – this can be clearly shown by an examination of the movement of the DOW Jones over the days leading-up to the Bill finally being passed. What we find is that the DOW was actually increasing at a reasonable and steady rate prior to the Bill’s being passed, in the hope that the House wouldn’t pass the flawed second Bill just like it refused to do the first time – but the Bill did pass, and it can be observed that the DOW immediately went into a sharp decline the very second it did pass – so much for the market’s cheer at receiving ‘good news’.



Why the decline in the DOW when it passed?



Well Wall St in the couple of days after the first Bill was rejected finally had time to read that rejected Bill (which as you will remember they tried to push through over a weekend and without public scrutiny), and Wall St rightly formed the view that had it passed then almost invariably US$700 billion would have disappeared off US shores and into the accounts of overseas investors and banks – not to Americans as the media, Paulson and those pushing the Bush Administration’s cause would have had everyone believe in the few short days leading up to the first failed vote. So Wall St – the real Wall St made of Moms and Dads saw a Bill that would require their great-great-grandchildren to pay for, and beyond.



Some may point to the DOW falling after the first Bill was rejected – again a close look at the DOWs movement on that day will show that 40% of the DOWs decline occurred before the vote was actually taken – on a Bill that the public hadn’t seen remember – and this was a vote of such importance that the market was told the vote was “assured” to go through – so adding to the seeming importance of its passage – but then to everyone’s horror the Bill didn’t go through – immediately the DOW changed course and continued to fall sharply, and fall because the market had been “assured” of an outcome that didn’t happen – (note to self: don’t tell the market something is ‘assured’ and fail to deliver – it gets angry).



The next day Wall St (and the greater financial market) finally had an opportunity to properly pick-over the finer parts of the failed Bill, and quickly the realisation set-in that it was crap, and that it would have meant billions going overseas to foreigners. Once that material fact started to dawn on the market, then the DOW began to steadily rally and rise upon the realisation the US market had avoided the possible loss of US$700 billion from its market to overseas accounts.



But – and there always seems to be a ‘but’ where the Bush Administration is concerned – the Senate played fast and kept a campaign of fear, doom and gloom running with the American people, and took the extraordinary step of passing the second Bill within a matter of days – the very second the Bill passed, Wall St which had already deemed the Bill as bad for Main St, immediately sent the DOW into decline – that decline was arrested and reversed into a rising DOW again, on the market’s hope that since the House had killed the first Bill off, it would do it again a second time – alas it didn’t and it passed – so once again Wall St showed it’s attitude towards the whole affair, the big steal, by again immediately throwing the DOW into decline, and sharply – showing yet again that whereas as citizens they get to vote once every four years, as business people with financial futures at stake, they get to vote daily by moving the DOW on what can best be described as the common sentiment on the street.



At the end of the day the TARP Bill was chiefly created to benefit foreign interests – at least this is the view communicated by the DOW (read ‘the people’) which in its collective wisdom continues to be displayed to the world ever since this whole charade became yet another Bush Administration master-minded reality – a little surreal, yes?



The US banking system never did nor will it receive much of the needed monies from the TARP package, the needed liquidity at the moment, that US$700 billion, thus why the DOW, the linear voice of the financial community and people who buy and sell shares, has been in an almost continuous decline ever since – the DOW community is very unhappy with the truth of the matter.



But thank goodness for the willing members of the ‘coalition’ – thank goodness for the United Kingdom. As we have seen overnight Britain has created its own bailout plan – with a key difference this time – the money only goes to UK banks for liquidity purposes, not buying worthless debt instruments at near ‘hold to maturity’ prices. The UK package will go some way towards what the world thought the US package was meant to achieve – but the US package didn’t and won’t achieve that intended outcome (much), so someone else had to step-in to fix the fundamentals of banking – its liquidity – not covertly paying-off upset foreigners who bought too much of your country’s ultimately worthless ‘securities’ – now that’s an oxymoron.



No doubt this story will unravel in greater detail sometime in the future, and those involved in the USA will make statements down the track about how necessary it was for ‘international stability’ that those foreign banks and investors were paid-off using the TARP legislation – perhaps even statements about how it headed-off economic warfare, maybe actual war – but for present purposes it is clear the US people were once again sold a lie.



There was and is a crisis, but the touted solution didn’t attack the liquidity crisis it was said it would – it instead paid-off very powerful and upset foreigners (who are no doubt to blame as well for buying *rap in the first place), who are also upset at the actions of this Administration, which with the complicity of it’s once Republican Congress pulled-back it’s country’s financial regulators, so enabling a select few to sell and get perversely rich (including Paulson) off selling junk to external sovereign nations – same Administration, different deja vu -- same rorted citizens who will be paying for an eternity.



At least in Australia we were never confused – we’ve always used a tarp to cover stuff up.