The markets are driven by uncertainty and right now one of the biggest areas of unknown is what will the Treasury do to help the markets. Right now the 800 lb Treasury gorilla is adding to the problem by not having a clear policy with TARP. The reversal in policies is now hurting the markets.
The size of the TARP is in flux. Congress approved a $700 billion program yet Secretary Paulson has stated that he will only use $350 billion and will allow the next administration decide what to do with the other half. So the market is now perceiving that the size of the Treasury plan will only be half of what was originally expected in the short-run. This has been equity negative.
The objectives of the TARP program have changed. Originally, the program was supposed to be used as means to buy bad assets, subprime loan, mortgages, CBO's, etc... Now the plan is money for equity infusions to financial institutions. So what happened to the mortgage market? It has fallen like a stone because the buyer of last resort no longer exists. This means that valuations have declined which have eroded capital. So everyone who was banking on one type of program a month ago now has a new program which is very different.This new reality was determined by the market last week.
Give the market clarity and it will have a better chance of rising.
The size of the TARP is in flux. Congress approved a $700 billion program yet Secretary Paulson has stated that he will only use $350 billion and will allow the next administration decide what to do with the other half. So the market is now perceiving that the size of the Treasury plan will only be half of what was originally expected in the short-run. This has been equity negative.
The objectives of the TARP program have changed. Originally, the program was supposed to be used as means to buy bad assets, subprime loan, mortgages, CBO's, etc... Now the plan is money for equity infusions to financial institutions. So what happened to the mortgage market? It has fallen like a stone because the buyer of last resort no longer exists. This means that valuations have declined which have eroded capital. So everyone who was banking on one type of program a month ago now has a new program which is very different.This new reality was determined by the market last week.
Give the market clarity and it will have a better chance of rising.
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