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Speaking of sequels . . . the U.S. Treasury today announced plans to purchase toxic assets off the balance sheets of banks. Haven't we been here before (see $700 Billion Mystery)? This time the focus is on a public-private program aimed to remove about $1trillion off the balance sheets with the government financing the purchases by private parties using about $100 billion of the remaining TARP monies. Like Race to Witch Mountain, details are sketchy. Happily, though, the markets responded well today at least, particularly shares of Citigroup Inc. and Bank of America Corp. Open issues, of course, include commitments from the banks to sell and buyers to purchase.

Others, including former Secretary of Treasury James Baker, are still urging that a non-sequel, original plan is needed here, in the form of a temporary bank nationalization (See Jason Kilborn's Banks Extending Crisis Pt. II). Surely, whether some of the troubled banks will be solid after removing toxic assets and whether management will make better decisions are debatable.

Larry Summers commented:

?We?re not managing to markets in the short run,? he said. ?We don?t panic when markets go down and we don?t become euphoric when markets go up.?

But is Summers correct? It is easy to be happy with the government initiatives when they bear fruit and impatient when they do not. We've already been down the road of an alphabet soup of bank programs. The public is troubled by the loss of wealth across the country. The end game of a long term market fix is correct, but that does not mean that short term fluctuations do not matter. But more about TARP II.

If purchasing troubled assets is such a good idea, they why did the Bush administration abandon it? Why a sequel here? The success of TARP II will depend on pricing of the toxic assets. If the government doesn't offer enough sweeteners, the banks won't sell and buyers will not buy. And, why should they? Government handouts without accountability come now on a regular basis. Like Jason Kilborn, I find little to persuade me that banks are able to make the difficult sacrifices toward recovery. That is, these same banks that are in financial difficulty may prefer to hold onto these assets. Not that the banks believe the government will let them go into bankruptcy. If these banks don't think the government is offering them enough money to clean up their balance sheets, they won't do it. They don't believe they will go into bankruptcy, as we've all been convinced they are too big to fail. Instead, they may wait for yet better deals from the government. The banks may not yet believe that they need to take the hit to their financial statements.

I remember late last year the outrage over auto executives flying private jets to ask Congress for bailout monies. Congress' stern response to the auto industry seemed well placed. The message being, if you want government bailout monies then an element of frugality is in order. The current hullabaloo over the AIG bonus/retention payments (See Jim Chen's Best and the Brightest!) sends the clear message that some of the banks/executives have not yet gotten the frugality message.

My biggest concern with TARP II is simply that it will not succeed if the banks that need it haven't realized that we operate in a new marketplace. At least, David Trone, an analyst at Fox-Pitt Kelton Cochran Waller in New York, claims the private investors will now shun government programs as the bonus scandal has led to a ?deep distrust? of the government and may cause a "massive brain drain" for those in the banking industry. Trone commented:

Either the banks need the toxic assets off their balance sheets or they don't. Quite simply, the government is not obliged to keep offering new menus of bailouts. The banks that don't need TARP II should not participate. Those that need the assets off their balance sheets should find a way to make it work. After that time, the government should evaluate the health of banks and simply nationalize those that failed to take responsibility to clean up their balance sheets. While I have been known to see many a movie sequel with enthusiasm, I, for one, do not want to see a TARP III.

? JSM

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