Pulling The TARP Over Our Eyes

Tim Geithner's not-so-secret plan to "save" the banks is shaping up to have a couple of needed elements in it, but it's mostly recycled TARP. The good:

For his part, Mr. Geithner will blame corporate executives for much of the economic crisis, according to officials. He will announce rules that require all banks receiving capital from the government to submit plans that describe how they intend to strengthen their lending programs and generally restrict them from using the money to acquire other banks until the government money is repaid.

It's a start, or course. But we're long past the point of needing a "good start". Geithner's also expected to announce a second effort to allow bankruptcy judges to be able to modify mortgages in an effort to try to salvage mortgages, something the GOP shot down three months ago.

But the bad part of the plan far outweighs the improvements.

It intends to call for the creation of a joint Treasury and Federal Reserve program, at an initial cost of $250 billion to $500 billion, to encourage investors to acquire soured mortgage-related assets from banks.

The Fed will use its balance sheet to provide the financing, and the Federal Deposit Insurance Corporation might provide guarantees to investors who participate in the program, which some people might call a “bad bank.”

“This program will provide government capital and government financing to help leverage private capital to help get private markets working again for the legacy loans and assets that are now burdening the entire financial system,” Mr. Geithner said in his prepared remarks.

A second component of the plan would broadly expand, to $500 billion to $1 trillion, an existing $200 billion program run by the Federal Reserve to try to unfreeze the market for commercial, student, auto and credit card loans. A third component would involve a review of the capital levels of all banks, including projections of future losses, to determine how much additional capital each bank should receive.

So, we're looking at, what, another trillion and a half tossed at banks? What makes anyone think this is going to work, especially when Geithner has sabotaged his own plan?

But as intended largely by Mr. Geithner, the plan stops short of intruding too significantly into bankers’ affairs even as they come onto the public dole.

The $500,000 pay cap for executives at companies receiving assistance, for instance, applies only to very senior executives. Some officials argued for caps that applied to every employee at institutions that received taxpayer money.

Abandoning any pretense about limiting the moral hazards at companies that made foolhardy investments, the plan also will not require shareholders of companies receiving significant assistance to lose most or all of their investment. Some officials had suggested that the next bailout phase not protect existing shareholders. (Shareholders at most banks that fail will continue to lose their investment.)

Nor will the government announce any plans to replace the management of virtually any of the troubled institutions, despite arguments by some to oust current management at the most troubled banks.

Finally, while the administration will urge banks to increase their lending, and possibly provide some incentives, it will not dictate to the banks how they should spend the billions of dollars in new government money.

And for all of its boldness, the plan largely repeats the Bush administration’s approach of deferring to many of the same companies and executives who had peddled risky loans and investments at the heart of the crisis and failed to foresee many of the problems plaguing the markets.

Even the NY Times can see what's going on here. Folks on Wall Street aren't convinced in the least that this will work either.

The new financial rescue plan may not work and could even make things worse because it plunges the US further into debt and it is designed by the same people who failed to forecast the crisis and take measures, legendary investor Jim Rogers told CNBC Tuesday.

Treasury Secretary Timothy Geithner will unveil a long-awaited package of measures to help the financial sector at 11 am New York time.

But Rogers said Geithner, who was president of the New York Federal Reserve Bank, "has been dead wrong about everything for 15 years in a row," and so was President Barack Obama's economic advisor Lawrence Summers, who acted as Treasury Secretary at the turn of the century.

"It is mind-boggling to me," Rogers told "Squawk Box Europe."

"If I were on your show 15 weeks in a row and was wrong, you'd probably never invite me back. These guys have been wrong year after year after year consistently and here they are making the same mistakes again. This is not going to solve the problem, it's going to make it worse."

And therein lies the problem. Geithner is part of the problem with the banks, not the solution.

It's pretty much doomed to fail before it even starts. Obama will be back with TARP III in a few months, surely. Geithner will again ask for patience and once again fail to make any meaningful changes, nor will he do what is needed to be done: nationalizing the insolvent banking system now.

Eventually we will be nationalizing the banks. This plan will not save them. Even the scope of the plan doesn't begin to address the $3 trillion plus the banks will have to write down still in lost toxic debt. The circumstances under which it will happen will be far less pleasant when we're forced to to do than if we did it in an orderly fashion now.

Of course that would entail a tacit and overt admission that America's banks are functionally insolvent, which cannot happen as long as the people involved in getting us to this situation continue to be the people trying to "correct" the problem...people like Tim Geithner.