Return of the TARP

It's back. No, it's back with a vengeance.

Almost four months after the mother of all mother of all bank bailouts took shape, all signs point to the new Obama administration reverting to the original purpose that TARP, or Troubled Asset Relief Program, was intended to accomplish -- dealing with troubled assets.

Rumors are swirling that a so-called aggregator bank -- political lingo for failure central -- may be formed with the remaining $350 billion in TARP funds, which could be leveraged with government-backed debt to swallow mountains of toxic assets, or even entire insolvent banks whole.

For those you of keeping track, this is the third approach that TARP has explored in as many months. Frustrating? Absolutely, but that's what happens when you put the notoriously inefficient hand of the government behind an unprecedented problem. While it has prevented a nightmarish systemic failure of the financial system, let's state the obvious: TARP hasn't done squat in terms of getting banks on a sustainable track.

Since TARP was first announced on September 19, here's how some of the largest banks have fared:

While it's easy to sit back and say, "Who cares about share prices? Shareholders don't matter any more," they absolutely do. The common denominator is that these banks need to raise more capital. Lots more. But without a significant stock price, that's impossible to do in the open market. As long as confidence in banks stays glued to the floor, shares will fall; as long as shares fall, banks have no choice but to turn to Uncle Sam for more capital; as long as banks go to Uncle Sam for more capital, confidence will remain glued to the floor. And around and around we go … when we'll stop, nobody knows. Except maybe Nouriel Roubini.

Who?
Nouriel Roubini, the NYU economist who predicted this mess years ago and rivals Chicken Little in cynicism. His latest estimate is that the U.S. financial system will eventually cough up $3.6 trillion in losses -- well over three times more than it already has. In his own words, "If that's true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion." Yikes.

As wild as that sounds, Roubini has rarely, if ever, been wrong since the credit crisis unfolded. Yes, there's an arms race between pundits trying to be the king of pessimistic predictions, but Roubini hints at a valid point: There's a chance -- growing in probability by the day -- that the next step in cauterizing banks' wounds is the dreaded "n" word -- nationalization.

That's essentially what the "aggregator bank" structure would achieve. The idea is that it by corralling the bulk of the credit crisis onto the Feds books, (a) confidence would be restored as investors stop worrying about myriad writedowns, and (b) with confidence restored, those banks would be better equipped to resume lending, jump-starting the economy. So everything's cool, right?

Wrong
An aggregator might be a step in the right direction, but it's by no means a panacea. I've used the phrase a lot lately, but Charlie Munger's remark that "When you mix raisins and turds, you've still got turds" makes so much sense these days. While an aggregator could unclog credit markets, it only does so by shifting more risk from private banks over to the central bank and consequently, well, you.

Scary? Mm-hmm. The only reason these trillion-dollar Hail Marys are possible today is because the dollar is still the world's alpha currency, and U.S. Treasuries are still universally viewed as the safest-of-safe investments. That trust is currently providing an unlimited spigot of cash, but how long can the scheme last? How "safe" does our economy look to the rest of the world when our biggest companies become wards of the state?

That's the big-picture problem. While necessary to keep our financial system from a downward death spiral, nationalizing banks further manhandles our currency and gives global investors new reasons to put us on overextended empire watch. Alas, the quest for a free lunch remains elusive.

I guess there's a silver lining: Currencies are valued relative to each other, and every other corner of the developed world is reeling right along with us. As far as central-bank insanity goes, we're actually in good company. It could be worse. Just ask Iceland.

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