Capital Market Angioplasty

Listening to the TARP (troubled asset recovery program) testimony the other morning on Capitol Hill by the Big Financial Three [Paulson (Treasury), Bernanke (FED) and Bair (FDIC)], I was most impressed by both Benanke and Bair while concluding that Paulson was nothing more than a blowzy bobo. This guy was once the CEO of the once venerated Goldman Sachs?? He is a better obfuscater than most of the blowhards on Capitol Hill. While Paulson has made some tweaks to the TARP following on his interpretation of the use of the funds, which will eventually save the taxpayers some money, he has steered away from the original intent of the legislation. The overriding intent was to purchase the "toxic" paper thereby providing additional liquidity to the financial markets.

When Paulson was asked, quite simply, what portion of the TARP funds had been used to deal with the "toxic" paper? His reply was that his department was working on it. To completely ignore the original legislative intent and develop his own program is extremely egotistical. It is no wonder Paulson is referred to as "King Henry" in many financial circles. The "King Henry" tag is further evidenced by his calling the big six or eight bankers into Treasury and force them to take TARP funds. At the least at that time he should have delegated the authority to the big bankers the task of utilizing a portion of the funds forced upon them to purchase some of the "toxic" papers. This could have been the start of the foreclosure mitigation goal.

Along the lines of the Sheila Bair (FDIC) mortgage forbearance program could have been initiated to re-liquefy financial markets and at the same time enable some homeowners to hold onto their homes during their financial distress. Further development of a forbearance program could include a BLM (big long mortgage) of the type the esteemed financial planner, Ric Edelman, advocates. These newly inked mortgages could then be backstopped by the government similar to the SBA's (small business administration) 504b loan program provided to small businesses. Under such a mortgage program the government can guarantees 50% of the loan, the big bank is liable for 40% of the loan and the mortgagee (buyer) has 10% at risk. This way everybody has skin in the game.

What is necessary is for capital markets to undergo this type of angioplasty to begin to liquefy the financial markets. Bankers can begin to have the confidence to make prudent loans to consumers and small business people and get this economy rolling again. "King Henry" needs to put down his scepter, roll-up his sleeves, stop making speeches all over the country, and get to work.