Michael Shulman

The Top 3 Bailout Trades

by Michael Shulman   11/13/08

What's Wrong With the TARP

The bailout -- the Troubled Asset Relief Program (TARP) -- is flailing away and on the verge of failing, not from a lack of intent, but from a lack of direction and money.

Yes, money -- yours and mine.

The TARP was designed to buy bad bank assets and quickly evolved into a program to inject fresh capital into banks as well.

It is authorized up to $700 billion, with $250 billion allocated by Congress. To date, banks have written off about $700 billion and, independent of Uncle Sam, raised a little bit more than $600 billion in capital.

The problem is that we are only one-third of the way through the write-offs.

Jim Paulson, the man who made billions shorting subprime mortgages, estimates another $1.4 trillion. My guess is $1.2 trillion, and the International Monetary Fund (IMF) estimates $1 trillion.

The capital being injected by Uncle Sam is not only inadequate, but it is being used to shore up balance sheets, not to create loans. And everyone knows this.

Investors know that the banks are not being forthcoming with how bad their balance sheets really are, which means no one wants to take their debt or invest. And without the ability to borrow or raise fresh capital, the banks cannot lend more.

Why are the banks lying?

Some are doing it on purpose, praying for a miracle -- no kidding, this happened in Japan for a decade.

Some are simply stupid and honestly see things turning around very quickly (Dick Fuld of Lehman Brothers (LEHMQ) says he fell into this category in order to avoid serious jail time).

And some -- many -- cannot value how bad their assets are because models don't work and the mortgage crisis is still getting worse. Every day the mortgage mess continues to surprise people -- and will continue to do so through the middle of 2011.