The Bank Bailout Is a Disaster

I applauded the government for stepping in to address the banking system. I wasn't so sure that the plan concocted under TARP was the way to go, but I was willing to give it a chance. That honeymoon period is quickly ending.

The program primarily governs the future of Citigroup (NYSE: C  ) and Bank of America (NYSE: BAC  ) . But it'll also have significant implications for other major TARP recipients, including Wells Fargo (NYSE: WFC  ) , US Bancorp (NYSE: USB  ) , and Goldman Sachs (NYSE: GS  ) -- not to mention the U.S. banking system at large.

The most recent release from the Congressional Oversight Panel (COP), a group set up to monitor the TARP, contained several notable insights -- none particularly comforting.

Lord of the TARP
Visitors to COP's website might notice the significant dissent in the five-person panel's ranks. COP issued a primary report supported by Chairwoman Elizabeth Warren, and presumably Congressman Jeb Hensarling and Damon Silvers. Then it sent out an alternate view put forth by Senator John Sununu and Richard Neiman. Finally, a solo Sununu penned a second alternate view.

Seriously, people?

Apparently, Sununu and Neiman were upset that the primary report spent significant time talking about potential alternative approaches to the subsidization program under TARP -- namely, liquidation and receivership. While they correctly point out that the COP should focus on the effectiveness of the TARP, rather than alternate plans, it seems silly to evaluate TARP in a vacuum. It's effective? As compared to what? Dropping napalm on banks' headquarters?

It would seem that we have either a partisan or an ideological dispute (or both) that's creating a rift at all levels. This has "political stalemate" written all over it.

The four commandments
But if the grievances within this panel make you want to throw your hands up in disgust, let me reel you back in for a moment. I do think we can draw something very valuable from the main report. 

Within that report, the panel -- or Chairwoman Warren, if you want to get cynical -- highlights four "critical elements" it identified in all successful resolutions of past banking crises:  transparency, assertiveness, accountability, and clarity.

I find these four elements particularly interesting, because there's nothing expressly financial about them. All four seem worthwhile elements for dealing with any crisis. And guess what? The Treasury seems way behind the eight ball on all of them.

When it comes to handling banks that need government aid to get by, it doesn't matter whether we're talking about massive JPMorgan (NYSE: JPM  ) or Capital One Financial (NYSE: COF  ) -- we need these four virtues. We need the government to throw its weight around a little when it's got billions of dollars on the line. We need somebody picking apart the actual contents of these banks' books. We need to be clear about how the process is being managed. And we need to hold people responsible where appropriate. (I'm not talking about political pandering.)

Currently, it seems we're simply handing out money, crossing our fingers, and hoping really hard that it all turns out well.

"Assertive" doesn't mean "blind"
The dissenters on the panel seem to imply that approach and effectiveness are unrelated. Leaving Las Vegas, I can drive to Detroit via New Orleans, and correctly say after each mile that I am now closer to my destination. Hence, my actions are technically effective. But that doesn't rule out the possibility that my approach is roundabout, inefficient, and, in this example at least, just plain silly. It seems to me that we should be judging TARP's effectiveness in the real world, not just the magical world of TARPland.

Furthermore, transparency, clarity, and accountability should apply to the government running the program as much as they do to the banks receiving aid. But if the Treasury keeps encouraging blind adherence to the TARP, and discouraging questions about how and how well it's actually working, we shouldn't expect to see much of those four virtues in action.

Further financial Foolishness:

Fool contributor Matt Koppenheffer owns shares of Bank of America, but does not own shares of any of the other companies mentioned. The Fool’s disclosure policy has never once been caught with its pants down. Of course, it doesn't actually wear pants …


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Comments from our Foolish Readers

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  • Report this Comment On April 08, 2009, at 3:39 PM, dlpfrench wrote:

    What a moronic article. Lets get this straight. The people who were supposed to be watching the banking industry in the first place missed everything and now the same group of people watching the bailout thinks its a disaster. How on earth would they know. BAC and others do not show the balance sheets to these clueless Washington dolts and all you and they are doing is beating them down and delaying a recovery. Where did you get an economics degree anyway.

  • Report this Comment On April 08, 2009, at 3:46 PM, TMFKopp wrote:

    Or we could say: the banks made a big fat mess of their businesses and now we're throwing money at them and expecting the same people who screwed up to fix the problem. Oh yeah, and we're not expecting them to give us any details on what they're actually doing to repair the problems.

    Are you really playing the "don't talk bad about the banks because it's bad for the economy" card? That's akin to shutting the door to your kitchen and pretending that it's not actually on fire.

    Matt

  • Report this Comment On April 08, 2009, at 4:22 PM, jsl4980 wrote:

    The people in charge of watching the banks are the ones who receive the most campaign donations from the banks and bank employees. Its no coincidence that there was a coordinated effort to turn a blind eye to every warning sign leading up to the collapse.

    Now you expect the exact same banks, lobbyists, and government officials to fix it with someone else's money? You've got to be kidding me... There are too many optimistic/gullible people out there who get behind idiotic ideas like TARP and stimulus packages.

  • Report this Comment On April 08, 2009, at 4:31 PM, 6thTexasCavalry wrote:

    "Currently, it seems we're simply handing out money, crossing our fingers, and hoping really hard that it all turns out well."

    ....more and more that's the way it looks....and more and more it appears it will take even more funds in the future...

    6thTex

  • Report this Comment On April 08, 2009, at 5:55 PM, WACowboy wrote:

    Does anybody remember that good old Hank Paulson, under "W", that got us into this bailoutmess? Just give the banks a ton of money and hope that they know how to use it for the good of all.

    Thanks Hank! Thanks "W". Just one more thing that the Bush admin left us for their legacy.

  • Report this Comment On April 08, 2009, at 6:00 PM, loon52 wrote:

    There is far too much "incest" between government and wall street. High level Gov't posts/jobs are filled by folks from Golman Sachs and others.....(Paulsen, Geithner, et.al.) which in my mind is a huge conflict of interest.

    Until there is a de-coupling of money (lobbyist and others) from government; this problem will never be fixed. Don't hold your breath.

  • Report this Comment On April 08, 2009, at 6:05 PM, kfrench890 wrote:

    Some of this is a grab for power by the government. There were some banks that did not want TARP money but who were told to take it or face endless audits.

  • Report this Comment On April 08, 2009, at 7:10 PM, BankmenAndRobing wrote:

    Transparency, clarity, and accountability?

    Just a suggestion: why not add one more?

    "Liability"

    Particularly in reference to derivative trading; notably Credit Default Swaps (CDO's). Trading derivatives by itself is not unlawful. However, as the law stands now, regarding commercial transactions, "any" Bank that messes up, for "any" reason may avoid accountability and liability simply by selling CDO swaps against a ligitimate company.

    The main identifying characteristic of this occurrence are circumstances forcing a company to sell Assets, whereby a Bank's involvement (for ex. in an Asset Based Loan Agreement) unexplicably results in a noticeable and significant under-liquidation valuation.

    Does a Bank, as a duty of care, inform a customer it has traded a loan in a derivative swap CDO? Try explaining to any Judge at the Superior Court level and above that there does indeed exist a scenario under which a Bank would not want to be paid off.

    See: at http://ssrn.com/abstract-929747

    "The Promise and Perils of Credit Derivatives"

    David A. Skeel Jr.

    University of Pennsylvania Law School

    Frank Partnoy

    University of San Diego - School of Law

    Page 3: "First, a credit default swap is a private contract in which parties bet on debt issuer's BK....."

    Page 17: "....a lender that has purchased default swaps may have the incentive to affirmatively DESTROY VALUE (emphasis included)"

    Pge 21: "However most industry participants doubt that judges will do much..."

    Ever see a financial measurement by a Federal Agency, like the OCC, expressed beyond $ Trillions?

    $ Quintillions?

    Bail Out the Banks? What is the difference between this action and "aiding and abetting"?

    BankmenAndRobing

  • Report this Comment On April 08, 2009, at 8:16 PM, xetn wrote:

    The main issue to me is if you run a company into the ground, regardless of the size, it deserves to fail. Absent that real fear of failure, there is no incentive to take precautions with your actions. Bailout just reward bad management and undue risk-taking. And worst of all, it leaves the taxpayers holding the bag.

  • Report this Comment On April 08, 2009, at 11:42 PM, brwn8484 wrote:

    Hello...When will all the naive people wake up and realize.....? This is nothing new. Just more of the same criminal behavior that got us where we are.

    "I like bats much better than bureaucrats. I live in the Managerial Age, in a world of "Admin." The greatest evil is not now done in those sordid "dens of crime" that Dickens loved to paint. It is not done even in concentration camps and labour camps. In those we see its final result. But it is conceived and ordered (moved, seconded, carried, and minuted) in clean, carpeted, warmed, and well-lighted offices, by quiet men with white collars and cut fingernails and smooth-shaven cheeks who do not need to raise their voice. Hence, naturally enough, my symbol for Hell is something like the bureaucracy of a police state or the offices of a thoroughly nasty business concern."

    -C.S. Lewis, Screwtape Letters, preface

  • Report this Comment On April 09, 2009, at 4:15 AM, DivHawk wrote:

    "All animals (banks?) are created equal".

    "Some animals (banks) are more equal than others".

    George Orwell, "Animal Farm"

    Lehman Bros., BearStearns not "too big to fail" because.......................?????

    Citi, BoffA, AIG, oh no - we gotta save them.

    I smell a rat, a VERY BIG rat.

  • Report this Comment On April 09, 2009, at 6:42 AM, hikerdude7088 wrote:

    There is no good way to save this situation. If we want to be the leader of the world, bombs just won't do it. We screwed the financial system and now we have to try and fix it. Unfortunately we are in so much debt we can't fix it. Obama can not fix what 30 years of greed brought us. This isn't about us, it is about the world and our part in screwing other countries. They all started asking for their money back at one time and there is no money to give them. There is more ways to kill a country than to nuke it. When people don't like you and the way you do things, they find a way to pay you back.

  • Report this Comment On April 09, 2009, at 10:14 AM, wolfhounds wrote:

    I personally favor the writer's napalm suggestion. There's plenty of excess gasoline laying around so it won't cost the taxpayers much. Once you get past the smell of burning bankers, we can build a sound financial system. Or not.

  • Report this Comment On April 14, 2009, at 7:40 PM, MyDonkey wrote:

    brwn8484 is right: this is nothing new -- Big Finance is the government's master. If the slave screws up (like it did by initially voting NO to the first bailout), the master says "Do it again and get it right this time." And the slave obeys like a good doggie.

    An article in the May issue of The Atlantic

    http://www.theatlantic.com/doc/200905/imf-advice

    predicts the US will either repeat Japan's lost decade or the world will head toward global financial collapse -- UNLESS we can break the stranglehold that Big Finance has on the US government. Do you think the master will allow that to happen?

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