While they eventually received wide-ranging powers to do things like recapitalize banks, the initial strategy was to buy up troubled, "toxic" assets from financial institutions to clean up their balance sheets. That's why they named it the "Troubled Asset Relief Plan." In their testimony in front of the Senate Banking Committee, they muttered something about the government being able to help the market with "price discovery" to make these assets liquid again. Here's what I wrote in a private email thread on September 24:
There is a ton of private money that would like to buy loans on the sidelines--my company has about $2B itself. The overall estimate is in the hundreds of billions--lots of people saw this coming and raised vulture funds. The problem is matching buyers and sellers. Buyers need to buy at fire-sale prices to get returns. Sellers can't go too low and fuck up their capital ratios. It's not clear to me at all how the government buying assets at the "Hold-to-Maturity" price (whatever that is) is going to be anything less than a wholesale bailout with zero upside for anyone but the banks who made stupid investments or loans in the first place.Today Paulson announced that, well...yeah...actually, that part of the plan won't really work.
The problem I have is not with Bernanke and Paulson switching course, and I'm glad they are able to admit when they might have been wrong and something isn't working (unlike, say, Donald Rumsfeld, et al). The problem is that they don't seem to have a very good grasp for what the root causes of the problems are and/or how to devise appropriate solutions. I don't have special powers of prescience. My comments above were just a regurgitation of what everybody in the mortgage industry has been experiencing for over a year. Plus it's common sense. How did Bernanke and Paulson not realize this? They have access to any and all experts and market participants. Paulson ran Goldman Sachs for crying out loud. How is he so clueless on this point? Or was he blindly beholden to conservative ideology until he and Bush finally said, "Screw it, nationalize the whole lot of 'em?"
Come on, Barack. Bring in a pragmatist who knows what he or she is doing.