Bad Bank Bonanza, Part 2

Looks like Monday's announcement will indeed be a Bad Bank Bonanza for struggling financial institutions.

The new financial industry rescue plan, to be outlined in broad terms on Monday in a speech by Treasury Secretary Timothy Geithner, will not require banks to increase their lending. That is despite criticism that institutions that already received money from the Troubled Asset Relief Program, or TARP, either hoarded it or used the funds to acquire other banks.

The incentives to investors could be in the form of commitments to absorb some of the losses from any assets they purchase, should their values continue to decline. The goal is to relieve the banks of their worst assets so that private investors might then provide more capital.

Officials hope that that part of the plan is not labeled a "bad bank" administered by the government, although they expect that some might call it that.

No matter what it is called, the government would assume some of the risk of declining assets at the heart of the economic crisis. But by relying on a combination of private investors and government guarantees, the administration hopes to reduce its exposure to losses and avoid the problem of having to place a value on assets that the institutions have been unable to sell.

A central element of the plan would be a major expansion of a lending facility begun in November by the Federal Reserve Bank of New York when it was headed by Geithner. The program, which was initially financed by $200 billion in Fed money and $20 billion in seed capital from the $700 billion bailout fund, lent money to investors to buy securities backed by student, auto and credit card loans, as well as loans guaranteed by the Small Business Administration.

Obama administration officials say they have rejected nationalizing institutions by taking large ownership stakes. They also will not immediately seek additional money from Congress beyond the $350 billion left in the TARP fund.

So, to recap:

1. Banks don't actually have to increase lending, (but that point is now in dispute as of today)
2. The taxpayer will now absorb the risk of trillions of bad toxic derivatives,
3. Private investors will profit while the government assumes the debt and risk,
4. The government will dramatically expand loan guarantees to insolvent banks,
5. The government refuses to nationalize the banks in any way.

Other than possibly the first point and the scope, this plan is no different from the Bush TARP plan. It's TARP, only bigger. The Republicans will block it just like the stimulus bill, and when it does pass later on, it will still fail to work.

Months from now we'll be in the same situation. Obama will have to come back for more money later on in the spring. The GOP will laugh him out of the room, and deservedly so.

We're in trouble now. Deep trouble. Pretty soon we'll be past the point of no return.

[UPDATE] Geithner is postponing the Bad Bank announcement until Tuesday, as the Senate will vote on the stimulus plan Monday.