The TARP Dog and Pony Show

Treasury Secretary Timothy Geithner's long-awaited plan for rescuing
the banks left people even more confused about the Obama
administration's agenda than they had been before the announcement.
This is best demonstrated by the plunge in the market, including bank
stocks, that immediately followed.

While it is generally foolish to assess the merits of a policy
based on the market's response, it is a safe bet that if the plan were
the unambiguous bonanza for the banks that many of us feared, bank
stocks would rally based on their good fortune. At this point, we
cannot be sure that it is not a giveaway, but apparently the banks do
not seem to think that it is. This is one of those cases where
everything will depend on the details, which we have not yet seen.

The one program that Geithner did outline with some clarity was a
plan to buy up newly issued investment-grade securities backed up by
car loans, credit-card debt, and student loans. This plan would expand
a Federal Reserve Board initiative, which has not yet been started,
from $100 billion to $1 trillion.

There is nothing obviously wrong with this proposal. It will help to
extend credit in these markets, although people with questionable
credit histories or who have recently lost their jobs will still have
difficulty qualifying for loans. One issue that is not clear is whether
there will be public disclosure of the assets purchased under this
program. The Fed had not been in the practice of disclosing the details
of its activities under its other programs. Either the Fed will have to
change its practice, or Geithner's commitment to openness is not as
great as claimed.

This brings us to the other program that Geithner only vaguely
outlined. He said that he wanted to partner with private firms to
arrange for purchases of the banks' bad assets. The Treasury would
provide guarantees that would limit the losses that private firms would
incur, as it has done with hundreds of billions of assets held by
Citigroup, J.P. Morgan, and Bank of America.

In principle, government guarantees could make bad assets attractive
to private investors. The problem is that the guarantees are in effect
a subsidy to the banks, since they add an enormous amount of value to
their assets. It may be difficult to know the full extent of the
subsidy, since many of the prospective buyers of the banks' junk are
likely to be private-equity funds and hedge funds, both of whom have
very little by way of disclosure requirements.

Fortunately, we don't have to follow the individual trades to know
whether the taxpayers are being ripped off. We just need to ask some
more basic questions like "How much will this thing cost?" If the
answer is anywhere much more than zero -- as Geithner suggested it will
be -- and we still see that bank stocks carry significant value and
bank executives continue to hold on to their high-paying jobs, then we
will know that we have been had.

The basic point is extremely simple. We have a large number of
bankrupt banks. We have a public interest in keeping the banks
functioning, but we have zero public interest in giving taxpayer
dollars to bank shareholders or to the executives that wrecked the
banks they ran.

Geithner can design as complex a dog and pony show as he wants, but
if his plan takes up hundreds of billions of taxpayer dollars and does
not involve wiping out the shareholders and sending the bank executives
packing, then he has ripped us off.

Chalk it up to business as usual.