Fed's TARP changes adding to anxieties

November 17, 2008
TARP, the acronym for the Troubled Asset Relief Program, the government's financial bailout program, earns its name. People use tarps to cover up junk you don't want other people to see, and you rarely want to peek under them for fear of releasing a putrid odor or scaring varmints that may have taken up residence.

A peek under this TARP reveals the difficulties the government is having getting its arms around this financial mess. The Treasury now says the $700 billion of rescue funds will not be used to purchase troubled assets (junk) as originally planned. To a degree, the changing nature of the rescue plan is understandable. In the early stages, the government was under the gun to take immediate action to address a problem that was getting bigger by the day. Now, some of those initial plans carved out in haste are being refined as other solutions have arisen in dealing with the scope of the problem.

Originally, the TARP was targeted to help the banking industry. Now, non-financial businesses are requesting assistance. The auto industry is teetering on the brink in a culmination of problems that have been festering for years. The life insurance industry has seen its capital depleted due to declining investment portfolios. Even vaunted American Express has decided to convert to a bank holding company so it can access the government's TARP funds.

So far, the TARP has invested $290 billion, mostly in the form of injecting capital into larger banks and acquiring preferred stock in return. Now, Treasury Secretary Henry Paulsen has indicated that the government is turning its attention to the consumer credit crisis.

Economists know the consumer is central to jump-starting the economy. A part of this plan will be some form of mortgage relief, which the regulators and banks are still struggling to implement.

The Federal Deposit Insurance Corp. has been outspoken that government assistance at the consumer level will be more effective than just sending more capital to the banking system. And in addition to attacking the mortgage problem, the Treasury will attempt to spur consumer lending through student loans, auto loans and credit card loans.

So right now our TARP is flapping in the wind with more problems poking out from under its edges. And, understandably, the public, and the markets, are confused and wary of where these rescue plans are heading. In the end, what we have to fall back on is that the United States is a wealthy country that is both dynamic and resourceful. The circumstances today are far from those in the 1930s, so we aren't going into a depression, but this will be a nasty, drawn-out economic downturn.

With regards to the stock market, it is important for investors to recognize that it is "forward looking." The stock prices we see today are reflecting the earnings or losses companies are going to report in the first and second quarter of 2009, and those numbers are going to look awful.

However, in the midst of what looks like terrible news over the next six months, don't be surprised if stocks start going up, anticipating an improving economic environment heading into 2010.

Again, nobody knows where the market will bottom, but investors who buy into the market decline will be rewarded in time. As stock prices move lower, buyers increase their long-term investment returns.


Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money-management firm. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.
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