Little Optimism Surrounds TARP

Eeyore might have been a better keynote speaker at today’s Summit on the TARP. At least he would have offered some optimism.

It was all doom and gloom today at the TARP conference presented in New York by the Securities Industry and Financial Markets Association, or SIFMA. To sum it up, the economy will worsen, credit performance will worsen, and the federal government is going to have to pony up much more than $700 billion to deal with it.

First to economic performance. Chris Flanagan, head of global structured finance research at JPMorgan Chase, says REO inventory and credit liquidations will “explode” in 2010. That’s largely because he sees the home price index dropping a total of 20% from its high in late 2007. So far the home price index is down 6% from its highs. Flanagan sees about $1 trillion of mortgage defaults by 2011.

By some estimates at the conference, the economy will suffer up to $3 trillion of cumulative losses that require government assistance.

Clearly, speakers at the summit put much hope in the asset repurchase program of TARP. That effort has not yet started.

“My hope is they do not push it aside,” said Randal Quarles, a managing director of the Carlyle Group, of the asset repurchase program. “Price discovery is essential. It’s the only way you get to market transparency.”

Transparency is an issue for TARP. Questions not just about the asset repurchase program, but about a host of other aspects of the TARP program (whole loan purchasing, loan modifications, Fannie Mae/Freddie Mac’s role, etc.) remain a stumbling block to TARP’s acceptance and apparently its effectiveness.

Neel Kashkari, assistant secretary of the Treasury for financial stability, even hinted that the asset repurchase program might never get rolled out, saying the decision remains to be made by Treasury Secretary Henry Paulson.

This whole mess can be boiled down to too great a difference between the bid and ask prices for assets, or as Quarles put it, the “big gap between distressed investors and reasonable returns.”

Until there is clarity on a host of issues, that gap will not shrink. While “TARP hopefully will bridge to a longer-term view,” Quarles said, there is no indication anyone’s view is longer than tomorrow. But TARP can’t work until the Treasury Department works out all its details.

Kashkari said “it will take months to complete all the TARP transactions.” It seems as though it might take much longer than that.