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Nevermind, We Don’t Want Your Toxic Mortgage Debt


The big plan to buy up all the so-called toxic mortgage debt gumming up the financial system seems to be a thing of the past.

In prepared remarks this morning, Secretary Henry Paulson said the original strategy to purchase troubled assets “would take time to implement and would not be sufficient given the severity of the problem.”

“Over these past weeks we have continued to examine the relative benefits of purchasing illiquid mortgage-related assets,” he said on the Treasury website.

“Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources, in helping to strengthen our financial system and support lending.”

Instead, he determined, with consultation with the Federal Reserve, that strengthening bank balance sheets via direct purchase of equity in banks was the way forward.

On October 14, the Treasury announced a plan to purchase up to $250 million in preferred stock in federally regulated banks and thrifts, and within two weeks, $115 billion had gone out to eight of the largest financial institutions.

The remaining TARP funds will be deployed with three main priorities in mind, including keeping both banks and non-banks well capitalized so they can continue to lend, buoying the auto loan, student loan, and credit card markets, and exploring more effective ways to reduce foreclosures.

Ideas currently floating around include maximizing the reach of the TARP program by attracting private capital via matching investments and developing a liquidity facility for “highly-rated AAA asset-backed securities.”

The Treasury is also looking at a number of proposals to increase loan modifications, though each would require “substantial government subsidies.”

“We are designing further strategies for building capital in financial institutions. Stronger capital positions will enable financial institutions to better manage the illiquid assets on their books and better ensure that they remain healthy,” he added.

Way to spread the confidence…see where the TARP money went so far.

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