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Friday, 26 September 2008

Politicking under the TARPaulin

Barney Frank, chairman of the House financial service committee said “I worry about this politicisation of it.” Of course, bound to be when it can eclipse the final weeks of the Presidential campaign. Both McCain and Obama have to use the grandstanding opportunity to look the more presidential. One fear is that Bush may feel politically that he should veto TARP so as not to diadvantage McCain who now supports the mortgage insurance scheme Republican alternative. This may not have majority Republoican support on the Hill, but it may be enough that McCain supports this whose capacity for anger-filled stubborness is legendary.
It is axiomatic in politics and international diplomacy that any great issue regardless of its technical, moral or ethical merits, is politically tradable. What are the political stakes. Bush has to be anxious that the next White House does not reopen all the cans of worms concerning the Iraq War, its origin, planning and prosecution and the $billions in missing procurement contracts, and the undeniable scope for corruption legal cases. A potage of financial crises left in the lap of an incoming Democratic Administration may also suit the outgoing Bush team.
These are intensely cynical conjectures. Bush may also ache to be seen rounding off his 2 terms by decisively saving US Banking Inc. from its "Pearl Harbor" (W.Buffett).
There is a proposed compromise on the table - to modified TARP to prevent “inappropriate executive compensation for participating companies”.
Paulson recognises the dilemma this poses. Will $30-$40m remunerated CEOs and their multi-millions earning "star performers" and high roller investment teams agree to save their banks if it means personally losing $millions? The compromise also would allow the Fed/ US Treasury/ FDIC etc. to take stakes in banks assisted under the plan and appoint its own oversight boards. The dilemma here is that participation in TARP automatically designates a bank as in chronic straits and would trigger some complex problems for the ratings agencies. To be able to borrow unsecured a bank or insurance company needs at least AA- status.
By teatime, the deal had fallen asunder; politicians going to the wire. McCain is cornered and Obama askance. A group of neo-liberal House Republicans had circulated an alternative plan for an emergency insurance fund for financial institutions instead of buying in troubled mortgage assets (TARP). What does this do to the $50 trillions of CDSs? Will the insurance be written on the distressed assets at current firesale prices, or at higher discounted cashflow & TTC prices? Are CDSs suddenly worth something or in fact worth nothing? Does McCain care or will he call in all favours and yank on every political lever to get his alternative accepted and win the Presidential race in one bound? Will Obama, astride a bipartisan fence, fall off or garner enough majority support on the floor of The House to win the Presidency, in the course of which he enters office with a bunch of favours owing to the other side? I'm reminded of the reputed (maybe only a rumour) deal between Clinton and Bush senior a fortnight before the end of the 1992 campaign when Bush agreed to back off campaigning in the final days if Clinton agreed not to pursue legal actions over the Iran-Contra scandal or seek to undo Bush's presidential pardons to individuals involved. Iran-Contra subsequently disappeared totally form the media and political landscape.
But neither OBama or McCain are backing down. Are the two campaign teams burning up the lines to Capitol Hill? They must be. The gloves were off and the big fight arena marked out when negotiations exploded into an emotion-filled slanging match (books will be written - Random House or Harper Collins or Atlantic Books, get in there now!) and it even had some knightly drama. Nancy Pelosi, the speaker, has made it clear she wants the unpopular bail-out legislation to be agreed on a bipartisan basis including the grisly modifications such as capping executive bonuses. Adding to the hundreds already arrested by the FBI is clearly not enough. Hank Paulson then, after the fracas, knelt down in front of Ms Pelosi, ring-kissingly imploring for her help in passing the legislation as planned. Meanwhile, a Treasury spokeswoman issued a statement urging members of “both parties” to complete the legislation quickly on the basis that “There are still open issues to be resolved, and we are committed to resolving them”. That may no longer be true?
UK, Europe and Japan finished the day 2% down, while the S&P 500 finished up 2% despite profits warning from GE that was matched by $25bn aid for Detroit motors. The dollar was broadly firmer and Treasury yields had risen, and no one paid any mind to Peer Steinbrück, the German finance minister, saying "The US will lose its role as a global financial “superpower” in the wake of the financial crisis (blaming Washington for failing to take the regulatory steps that might have averted crisis) adding “This world will become multi­polar” with the emergence of stronger, better capitalised centres in Asia and Europe, The world will never be the same again.” This is wishful thinking and diplomacy of the shallowest kind.
Conditions in the money markets remain in deep doodoo; short-term rates hardening and lending beyond overnight paralysed in intensive care, and nowhere more so than in Europe, not just in the US. Hans Jorg Rudloff, BarCap's chairman, said: “Anyone looking at the money markets would come to the conclusion that we are one minute before a terminal heart attack. Therefore the rescue package will pass. There is no choice.” But, has he reckoned with what happens when two enormous forces super-collide, a fully transparant US Presidential campaign and the dark forces of shadow-banking; brings to mind the Wildean quip, the unspeakable in pursuit of the uneatable?
Meanwhile, reading down the small-print, new data revealed the massive increase in Fed liquidity support over the past week, including $73bn in indirect loans to money market funds and a doubling of direct lending to investment banks and primary dealers.
All may stumble on down the dark cavernous maze like Theseus unravelling Ariadne's ball given her by the high flying Daedelus to slay the bull Minotaur to be played out at first presidential debate, scheduled for prime time Friday.

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