for taking a day off yesterday, I decided to bone up on Treasury Secretary Paulson's announcement of his "did I say we'd buy troubled investments?" about face to our $700 billion bailout/investment in the nation's financial system.

When you're already sick and tired from being actually sick and tired, nothing says "sleep, my little one" like a Paulson press conference.

Nonetheless, I slogged on and actually formed an opinion of the new strategy, despite the (ahem) less-than-polished presentation skills of the guy who's in charge of all that moola.

First, some background. 

As you recall, in September the U.S. financial sector came down with a giant case of the financial flu, due in most part to the decisive bursting of our housing bubble and aided by the iffy-nature of (unregulated) asset backed securities used to create liquidity in the mortgage and consumer credit markets.

Paulson asked for a blank $700 billion check to stop the flu from turning into Ebola and congress balked.  One week later, having put in place several necessary caveats about executive compensation and taxpayer participation in potential profits, Paulson took charge of what we now lovingly refer to as TARP.  TARP stands for "Troubled Asset Relief Program."

What Paulson announced on Wednesday makes that name moot.  Rather than purchasing troubled assets from banks in order to provide them with greater liquidity, Paulson decided to invest directly in 8 major banks so far(representing 55% of the U.S. banking system according to Paulson) by purchasing preferred stock.

Paulson took most of the press conference to get to his reason for the change of plans which is, in a nutshell, that buying up troubled assets would not have provided enough liquidity in a timely enough fashion to ease credit markets quickly.

One of the fundamental issues with the original request, as I recall, was that there didn't seem to be a reliable way to value these assets, which are essentially similar mortgages compressed into bundles of credit risk  and sold as securities.  It was a concern I shared, but I was somewhat reassured by Paulson's positive assertions that it would be possible to assess, correctly price and acquire these assets.

Turns out, we were both wrong.  Paulson in his belief that such a gargantuan task could be done, and done by the government, and me in believing smarter people than me could get that job done.

So in an odd way, I'm relieved by this development.  It's cleaner to invest in banks directly than it is to take on their drek and try to make sense of it.  It fulfills the same goal--getting banks stable by increasing their capital, thus freeing them up to begin lending once again.

What it doesn't do is account for a worse downslide to these troubled assets than we currently project.  That's of concern.

And there also doesn't appear to be any direct requirement of the banks receiving the capital that they actually use their newfound liquidity to lend money.  While it's true that banking regulators issued a statement saying that all banks have benefited from this program and thus all have responsibility to lend, to provide dividends, to manage compensation and to mitigate foreclosures...well, let's just say that I'm not sure strongly worded lectures on responsibility carry as much weight as contractual obligations.

Paulson also declared that he is on a "time out" with the balance of the TARP funds ($350 billion), waiting for incoming President Obama to have his say with the rest (and with congress's approval required).  At least, that's his plan for now and one that I think makes sense.

To sum up?  I think the about face is a good decision that leaves me more uneasy with Paulson's leadership of these programs than I was before.  Unfortunately, it appears Wall Street agreed with me.

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