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Jeff Saut: Pulling the TARP Over Our Eyes


Government does market more harm than good.

Editor's Note: The following article was written by Raymond James Chief Investment Strategist Jeff Saut. It has been reproduced with permission for the benefit of the Minyanville community.

"The US Treasury secretary's first brush with Wall Street this week was close to a total disaster, after a much-hyped 'comprehensive plan' to restore the stability of the financial system failed to address the crucial questions of how the toxic assets on banks' balance sheets would be shifted, and how the resultant holes on giant banks balance sheets] (such as that of Citigroup (C)) would be plugged."

--Aline van Duyn, Financial Times, February 14, 2009

Fool me once, shame on you; fool me twice, shame on me. And I clearly got fooled again last week, as Tim Geithner's much-hyped "comprehensive rescue plan" was close to a total disaster.

Indeed, I was first fooled last September when then-Treasury Secretary Henry Paulson introduced the original Trouble Assets Relief Program (TARP). Given the seriousness of the situation in the autumn of 2008, I thought politicians would surely set politics aside to pass TARP. Silly me - it went down in flames, an so did the equity markets.

Later that same week, a worried Congress cobbled together and passed its own rescue plan, which was chock-full of pork-barrel legislation. That passage led to a brief stock-market rally. But the selling stampede was already in full swing, and wouldn't end until the capitulation climax of October 10, when 93% of the stocks traded on the NYSE made new yearly lows. While the major averages would eventually slide further into their November 20 price lows, that 93% ratio would not be breached.

And last week, Secretary Geithner's "comprehensive plan" (TARP II; now called the Financial Stability Plan) was so opaque that the resulting Dow Dive would leave the senior index lower by 382 points into Tuesday's closing bell. I got fooled again.

Investors' worries seemed to center on the fact that there was no "bad bank" solution, nor an aggregator bank (such as the Resolution Trust Corporation). Instead, a Public-Private Investment Fund (a mixture of private capital and public funding) will make "large-scale" asset purchases (allowing private-sector buyers to determine the price of troubled assets). Also unmentioned was the hoped-for suspension of FASB 157 and FASB 114, which deal with impaired assets and mark-to-market valuations.

In deference to Mr. Geithner, he and his team are clearly very bright people - perhaps the lack of details in his plan was intentional. Manifestly, with a vote slated for late last week on President Obama's stimulus package, maybe Mr. Geithner didn't want to upset the apple cart by telling legislators that another $800 billion wasn't nearly enough to cure the current situation.

More importantly, however, our elected nimrods once again failed to rise to the level of statesmen by packing even more "pork" into the hastily passed Obama Stimulus Package (the American Recovery and Reinvestment Act; or ARRA). And, "hastily passed" is the correct phrase, for legislators had a mere 12 hours to read the 1,100-page bill before voting on it, causing one savvy observer to exclaim, "What transparency?"
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No positions in stocks mentioned.
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