Changing TARP Rules Changes Market Direction

Changing rules, even when the change may ultimately be good, can be disruptive. As a result of the change in the TARP from buying troubled assets to injecting capital directly into companies, the credit markets have once again reversed course (see Financial Times article).

The fact that now there are no buyers for some toxic assets has the value of some mortgage-related securities falling to new lows. Jay Mueller, portfolio manager from Wells Capital Management, said it best:

Now those markets will go back to being completely illiquid as there will be no price discovery process started by the Tarp. It is tremendously difficult to trade when the rules of the game change.

Now that the government has realized that it cannot justify and support non-market prices, the banks and other holders of toxic debt will have no choice but to further discount and account for reduced asset values. For the rest of us, this just means more volatility, lower asset values, and a market that continues to suffer under its own weight. At this point, "building a bottom" may be the best we can hope for in the near term.

Comments

[ScottEX:]

TARP.. My first thought when Paulson announced his team of expert auditors was, good luck. I was an early casualty of the crisis as a fresh and idealistic MBA in the CFO's office at Merrill Lynch.

I was truly shocked by what I found there. I sat within earshot of the CFO in a then temporary office in Hong Kong. I was on a desk of ten controllers charged with managing the book and records for the regions equity derivative books. Under-trained, low skilled, and put to a task that a team of 100 would have trouble accomplishing.

When I arrived there my new boss was frantically trying to make sense of the trading records. Why not let the new guy do it. A typical day for me went something like this. An incomprehensible ream of data was dumped on my desk. I was instructed to flatten and comment. The trading managers are quite skilled at deception and experts in the game of hide and seek. The data I was given was on average about 10% complete. Combined with the byzantine web of accounting entities and trading books, I was left guessing most of the time as to what was on a book or off a book, and just what the hell “it” was. Mr. CFO is having lunch again with this or that millionaire in town for a game of golf, but I know he is actually from Krypton and assumes super human powers of intelligence. He has a perfect grasp on the accounts, I’m sure. So there I went with my team slashing and hacking and writing my vague comments all over the place. The product controllers were earning about 50,000USD down there.

My theory is this. The TARP people went in and saw the same impossible mess that I got a glimpse of and said forget about it. I don’t think it has anything to do with how to value complex securities. What we are talking about here is how to value smoke mirrors lies and deception. With Citi axing 52,000 jobs this week I'm left to wonder whether those people might be worth saving. At an average of 50,000/year, the total savings to the company in annual salaries is pretty close to the amount that could be saved axing about 20 or 30 directors and execs. I know these Kryptonian white shoe Ivey leaguers at the top have superhuman powers, but I’m still thinking that the 52,000 workers would be more useful to the company and society.

2008 Nov 22 02:28 PM