US Treasury Shifts TARP Focus, Routs Global Markets

Treasury Secretary Henry Paulson, whipping out his dead economist quote book, used this gem from John Maynard Keynes to justify his bombshell Troubled Asset Relief Program update and redirection:

"I will never apologize for -- for changing an approach or a strategy when the facts change. I think the apologies should come the other way if -- if someone doesn't change when the facts change."

Unclear on what facts had changed, Paulson outlined a radical departure from the core premise of the original TARP proposal. The US Treasury is no longer considering the buying of troubled mortgage-backed assets, which have now dropped to about 42 cents on the dollar.

Paulson indicated that TARP funds are now being considered for deployment to the non-bank financial sector, including credit card and auto loan debt. These are two sectors that are oftensecuritized like mortgages, but are the most recent to see severe credit tighten as consumer default rates begin to climb.

Although the contagion effect may be spreading to other areas of financial market, catching the eye and concern of the US Treasury, the bigger problem may beTARP's seeming inability to efficiently deploy funds. To date TARP has only earmarked and implemented a single plan to inject $250 million into US banks to stabilize their balance sheets.

Getting immediate political heat for stoking banks with capital that lead to a brief acquisition spree, Treasury seemed to freeze their action to reassess. Meanwhile, the toxic effects continue to spread.

Now there seems to be a political and bureaucratic battle over the remaining funds: Congress looking for more direct help to homeowners and an auto maker bailout, a President-elect pushing TARP funds use to help auto makers, and the FDIC that wants a piece of TARP to support loan modification guarantees.

The net effect--regular briefings about new strategies from Paulson and Kashkari, but no action. Ultimately, resulting in more uncertainty, weakening Treasury credibility, and knee-jerk reactions in the trading markets--like today's plunge in overseas markets and US futures.