Stephen Roach, chairman of Morgan Stanley Asia, criticized the Treasury Department for how it has implemented the $700 billion Troubled Asset Relief Program (TARP).
Specifically, Roach takes issue with the decision by Treasury Secretary Henry Paulson to abandon the idea of buying soured mortgage securities from major financial institutions.
In an interview with Bloomberg TV, Roach said that was a major reason why Citigroup deteriorated to the point that the government had to bail it out.
“Citigroup raises the question of what’s going on with TARP,” Roach says.
“If TARP was allowed to unfold the way it was originally enacted, the Treasury would be in the business of dealing much more directly with toxic securities.”
If the government was buying those securities, “Citi and others would have had a better way to manage their exposure,” Roach says.
“When Treasury announced a 180 on TARP, Citi was left hanging.”
And why did Paulson change his mind?
“I don’t know,” Roach says. “There were clamors to go from buying toxic assets to direct capital injections into banks, and the initial effort was completely abandoned.”
Roach says he can’t predict when financial markets will recover. “Given the magnitude of excesses building up in the last four-five years, no one knows with certainty how long it will take to unwind,” he says.
Some experts criticize Paulsen for broadening the scope of TARP, to credit card companies for example.
“It's much too broad and much too vague,” Lee Ohanian, a UCLA economics professor, told the Los Angeles Times.
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