Ignore the US$700B TARP rejection

Ignore the vote that just took place in Washington on the proposed US$700 billion TARP program. It is a political tactic, and nothing else.

Events of the past seven days are all starting to make sense now. Senator McCain puts his Presidential campaign on hold one day last week, and rushed to Washington to get into the mix on the proposed US$700 billion TARP program. Soon thereafter, a well-organized group of House Republicans starts to kick sand in the face of anyone in favour of Treasury Secretary Paulson’s proposal.

The all-hands-on-deck meeting at the White House serves to accomplish nothing, with Mr. McCain and Mr. Obama each coming out with a different spin about who is to blame for the state of affairs. Over the weekend, a deal is struck that was thought to be passable by all sides. If politicians needed any reminder about how tough the world is right now, Wachovia (WB:NYSE) sold itself to CitiGroup (C:NYSE) this morning for what appears to shareholders to be 10% of the Friday closing share price.

And yet, to the surprise of most senior elected U.S. officials, the plan is voted down a few moments ago. Market sells off 500 points. House Republicans huddle to devise next steps, having just yesterday appeared to have been in favour of a proposal to solve the overhang currently clouding the credit and equity markets.

With an eye to November 4th elections, and losses predicted in both the House and Senate, Congressional Republicans seem to see this crisis as providing the opportunity for a Hail Mary pass. By voting down the proposal, newspapers tomorrow will report that “The Deal Is Off”.

Local television stations will be running double-enders during the supper hour tonight. Those that opposed the bill will be pounding their chests, with the theme: “this Bill did nothing for the average family”. The folks in Congress who opposed the bill at noon today knew yesterday that they were going to vote it down, recognizing that the market would throw a fit.

Tomorrow, or the next day, or the day after that, I predict that the Bill will be amended just enough to show some victory for enough lawmakers to get a package through the Congress. In the meantime, the market gyrations serve to ensure that most voters will be watching television tonight, or reading their paper tomorrow am.

With a few weeks to go, few politicians will want to appear to take the side of Wall Street over Main Street. That’s why the Bill went down. If Mr. McCain can play his cards right over the next 48 hours, he’ll be able to claim some victory from the jousting that is to come.

But, as the Terminator would say: “I’ll be back.”

MRM

Here is the link for Seeking Alpha’s pickup of this post.