Resolution Trust Corp vs Troubled Asset Relief Program

The Federal Reserve's program to help alleviate the stress in the credit markets has formally been called the TARP which stands for Troubled Asset Relief Program.  Informally, though, many are hoping it turns out to be an RTC II, given the program's success in the late 80s and early 90s.  Given the comparisons between that period and now, we looked to see how stocks and bonds were trading then versus now. 

As shown in the charts below, there are several key differences between the two periods.  For starters, back then stocks were in rally mode heading up to the formation of the RTC.  Today, we're in a bear market.  On the fixed income side, bond yields had fallen sharply leading up to the formation of the RTC in August 1989, while currently Treasuries are in a trading range.  But the biggest difference for Treasuries between now and then is that in 1989, the Ten-Year US Treasury was yielding 8%.  Last week, the yield on the Ten-Year spiked 40 basis points on news of the new bailout program.  But even after that spike, it is yielding under 4%, which is less than half the levels it was trading at in 1989!

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Comments

[Mike]

Bernanke said today that the goal of $700 billion package is to bring current mortgage related paper fire-sale prices closer to hold-to-maturity price...
In other words, they are engineering a mother of all short squeezes.

1. There are hundreds of hedge funds that have shorted billions of mortgage related securities.
2. Bernanke and Paulson want suddenly bringing the prices of these securities significantly higher (from the current fire-sale prices up to hold-to-maturity price).
3. As the price of these securities move higher, many hedge funds will be forced to buy (to cover) billions of this mortgage paper.
4. Many banks hold the same paper on their balance sheets and will report WRITE-UPS
5. Banks reporting write-ups ignites stock market rally and stock market short squeeze

[real estate rebates]

is TARP going to buy and sell real estate?