Many people are up in arms this morning with regard to Treasury Secretary Paulson's switch on the TARP objectives. Operating under the assumption that he has a finite amount of dollars to spend and knowing that he only has $60 billion to spend before he has to go back to Congress and ask for the next $350 billion, Paulson has recognized that he has to put the consumer finance machine on life support. Therefore, he has made the decision that the $250 billion that TARP directly invested in the banks, plus the $40 billion infamnia to AIG, is enough to shore up that sector without having to buy the "troubled assets". Personally, I thought that the purchase of those assets by Treasury from the banks would have been one gigantic cluster-f**k. So unlike others, I'm kind of glad that it's not going to happen.
This latest move into the consumer finance arena is very interesting. I think what Paulson et, al have finally figured out (I still find it amazing that neither Bernanke or Paulson seemed to have a clue on how consumer financing was getting done the last decade) that the Wall Street securitization machine was the dominant provider of financing in this country. From residential mortgages, to washing machines to leveraged buyouts, we securitized EVERYTHING. While it was working, everybody was winning. Consumers and companies were getting cheap financing, producers were able to sell their wares because all the customers were able to obtain the cheap financing, and most importantly, Wall Street was able to make BILLIONS. We have a few rules at Monkey Business and one of them is, "If everybody at the table is winning, at some point in the future, everybody is going to be losing....a lot."
As we said yesterday and Monday, when American Express came calling to become a bank and trade their independence for liquidity, Paulson realized that the entire consumer and commercial finance infrastructure was broken. Hence, the new focus on consumer finance. I guess what Treasury is going to do is essentially become the arbitrage (also known as the sucker) on credit card, student loan, and auto asset backed security deals. Treasury will probably buy AAA rated tranches of the deals at a level that makes the deal work, at least flat (no profit in the deal, just cost). I assume that some sort of Federal Reserve funded facility will be a bid for secondary paper to get that vital market trading again. This brings me to my title, "Another Key Indicator Treasury & the Fed Should Have Been Watching." Every year, during the glory days of structured finance, the Asset Securitization Forum (ASF) would have a blow out conference/party in Vegas (AFS West) and Miami (AFS East). These were shindigs that Roman emperor Caligula would have been proud of. As a sign of the times, this past October they held ABS East. Instead of South Beach Miami they held it in Hollywood Florida, home of the Dogtrack and conveniently located next to I-95 so you could get the hell out of there! If Paulson and Bernanke were paying the proper attention to that dramatic party shift, they would have seen AMEX coming! As a special added bonus, here's a little thing Richie and I shot at this years ASF West!
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