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This article was authored by Shahriar Shahida, CIO at Constellation Capital Management LLC, New York:

During the past three weeks since Congress passed TARP, the levered loan and high yield indices have fallen over 7%; the AAA tranche of the 2007 sub prime mortgage indices are down over 19%; and the SP 500 index is down over 22%.

The question that begs to be asked is why? Wasn’t TARP supposed to provide a huge boost to confidence and help stabilize all of these markets? If TARP was achieving its objectives, would investors across asset classes and the globe continue their indiscriminate selling?

Clearly, the markets do not believe that the largest banks and investment banks will use any of $250 billion newly infused TARP capital to extend new loans anytime soon.

Frankly, who can blame the bankers? Why would anyone in his right mind agree to lend new money when that dollar is immediately traded at a discount to its face value? For new lending to resume, secondary prices need to stabilize first.

Since in most countries, creditors are senior to shareholders, the equity markets don’t stand a chance of seeing a sustainable recovery unless credit instruments stop their relentless sell-off. For TARP to work, the Treasury and its agents must conduct transparent and meaningful buyback of debt across the different buckets of credit. Confidence begets confidence, and given the amount of cash sitting on the sidelines, the doom and gloom psychology can......................

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