Washington Waffles

Story Highlights:

• Building on past statements, the Obama administration released more details on the latest incarnation of TARP Tuesday.
• No final decision was forthcoming, prolonging private investment's incentive to sit it out on the sidelines for the moment.
• But for investors, the greater risk now is being out of stocks when the government finally sticks to a plan (perfect or not) and doubt lifts, freeing stocks to rise quickly.

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The waffle comes in sundry shapes and forms: the Belgian waffle, waffle cones, waffle fries, waffle dogs, and of course, the ubiquitous Washington waffle. As ever, eager to please (and maybe that's the problem) the feds' waffling ways worsened Tuesday. Building on past statements, the Obama administration released more details on the latest incarnation of TARP. We can imagine the collective sigh: Here we go again.

The latest in TARP's third installment, the plan would create multiple funds, provide federal seed money, and appoint private investment managers who are willing to put up capital to boot. The funds would buy and manage so-called "bad assets" and be open to other members of the private investing community—pension funds or other institutional players for instance. The private part of the equation supposedly helps solve persistent asset pricing problems faced by both the Bush and Obama administrations by allowing for a more market-like solution. How exactly that will work isn't yet known. Federally imposed risk moderation will always distort prices—period. But in essence, this plan provides private investors very cheap government-financed leverage with limited downside and potentially very substantial upside. The government is willing to offer a possible "freebie" to some in the private sector, hoping to free bank balance sheets of some types of illiquid securities.

Releasing more plan details is fine and good. But the bottom line? "No decision has been made on the final structure." So the central problem remains—private investment sits it out on the sidelines, waiting for the government to set the rules for good. This is all too familiar. Why invest or lend now? Especially when the standard party line is: You'll get better, non-market, government-subsidized terms down the line. Why not wait for those?

Nonetheless, government waffling—and subsequently choppy markets—continues with the release of half-plans and delayed programs. The Fed's Term Asset-Backed Securities Loan Facility (TALF), originally announced in November—then delayed, saddled with executive pay limits, subsequently freed from them, and now rumored to be eligible for a wider scope—is just one case. The longer the government waffles, the longer securitized debt markets will remain locked, bank solvency questioned, and investors hopping on coals. This one at least has a firm start date—March 25, 2009—and specific terms have now been established.

Although all the turbulence is uncomfortable to be sure, for investors, the greater risk now is being out of stocks when the government finally gets it right—i.e., sticks to a plan, perfect or not—and doubt lifts, freeing stocks to rise quickly. The Washington waffle is bitter on the way down, but once the plate's clean, sweeter treats tend to follow.