TARP

First of all we should all agree that Congress sucks at naming things. TARP or Troubled Asset Relief Program.

I just watched Barney Frank on Bloomberg, and he will be releasing all the details of the improved TARP legislation this afternoon. From is comments all the signs are encouraging. More accountability, more money getting to community banks, money available for Treasury to by Municipal bonds to lower Municipalities borrowing costs, $40 to $100 billion for foreclosure prevention, and much more.

Most of this is spot on. Paulson and the folks in the Bush Administration have failed on many levels during this crisis, but the direction of relief is the largest amongst these failures. During 2007 and/or 2008 they should have taken bold action in the housing market to keep people in their homes and renegotiate their mortgages. Although a 21st century run on the bank and loss of confidence in the CDO, MBS, and other derivative markets were the front page story. What under lied this panic was actual defaults and foreclosures by actual people. So, if they would have stepped up earlier to stem the homeowner tide or mitigate the necessary losses much damage may have been avoided.

The foundation of this rationale is that banks only get about 50% of the money back on a foreclosed property - and as far as I know this number does not include administrative costs which are considerable. And CDO and MBS markets (this number is based on what I remember from memory, ill try to find the actual) have dropped some 60 to 70% at certain points. This means renegotiation would be beneficial in many instances for both the homeowner and the investor. I give you the Sheila Bair plan.

This plan is absolutely necessary, my hope it only that Tim Geitner and his staff are bold enough.  If they can create a workable model like the Bair plan estimates are that 1/3 or 1/2 of foreclosures can be avoided. This urgency of this plan is not only the havoc more defaults and foreclosures could reap on financial markets, but also the externalities experienced by affected communities.

 I drove down a 16 house street the other day with 9 vacant foreclosures houses. First and foremost those other 7 families are in trouble because this much vacancy lowers their home values and makes it all but impossible to sell their homes. It creates an fertile ground for criminals and desperate unemployed people to steal from those vacant homes and/or tear apart the inside and outside of the house. Without a community cooperative effort houses will degrade and yards will not be mowed. The lose in property taxes will force budget cuts in essential services like police, fire, and education. 

The long and short of all this is that Barney Frank and Co. are on the right track with their vision for the last $350 of the TARP, but it must be used boldly, intelligently and then lets just hope we do not need TARP II. Even with bold action something tells me TARP II is just around the corner.