Bernanke Reiterates Original TARP Strategy

Speaking today in London, Fed Chairman Ben Bernanke said banks still need more help. If his recommendations sound familiar, it’s because he’s calling for exactly what TARP originally called for then actually did. At first, TARP was to buy or guarantee bad bank assets, then it was deemed more productive to inject liquidity into banks directly. More below from FT:

…the Federal Reserve chairman said he would like the Obama administration to combine capital injections with a plan to cut troubled assets from bank balance sheets – the idea behind the original version of Treasury secretary Hank Paulson’s troubled asset relief program (Tarp). “More capital injections and guarantees may become necessary to ensure stability and the normalisation of credit markets,” he said.

Banks and investors are sitting on many thousand billion dollars’ worth of illiquid assets for which there is little demand and fire-sale prices. There were some $2,794bn worth of US asset-backed bonds alone at the end of last September, including subprime, credit card and commercial mortgage-backed deals, plus more than €1,500bn ($2,010bn) of similar assets in Europe, according to the Securities Industry and Financial Markets Association.

Mr Bernanke’s comments came as Obama officials battled to avoid a protest vote in Congress against releasing the second $350bn tranche of the Tarp fund.

The Fed chairman was careful not to tell the Obama team what to do. But raising the possibility that the Obama Treasury might “decide to supplement injections of capital by removing troubled assets from institutions’ balance sheets”, he gave three options.

One would be public purchases of troubled assets – as proposed by Mr Paulson. A second would be for the government to provide asset guarantees in return for warrants. The third would be to “set up and capitalise so-called bad banks, which would purchase assets from financial institutions in exchange for cash and equity in the bad bank”.