Was Paulson's decision to pull the plug on the original TARP idea of investing into the illiquid assets a smart thing to do? I am almost certain that while the original goal has never been too realistic to begin with the implicit existence of a potential "cleanup fund" has certainly helped to slow the decline in security values for a little while, so cancelling it now does not sound like a smart idea. In my opinion, it is just another example of government intervening into the economy by changing the rules in the middle of the game and potentially making things worse instead of better.

Simply glancing at the prices of both residential and commercial mortgage backed securities, as presented by Markit.com since the TARP announcement, confirms that situation deteriorated so rapidly, that even I now suspect that we might very well need another round of equity injections into the "big boy" banks before it's all over...

The recent decline of values in both commercial and residential securities has been simply stunning to say the least. I am not sure if free fall is the right word, but it certainly does not look promising. It does appear that there were quite a few investors expecting to unload their paper to the government, and with the "purchase" program now all but cancelled these investors unloaded their paper simultaneously over the last several days likely making losses even more painful for a whole bunch of financial sector players.

Residential MBS values...

source: markit.com

Commercial MBS spreads- higher number means lower values...

source: markit.com
The only fundamental question now is whether these declines represent the real underlying asset values or are they merely an indication of the accelerating liquidity crunch? Most of the number crunching points to the first scenario; however, too many of the current players might not make it long enough to find out...

Being safe out there now is much tougher than just a week ago...Go SKF?
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