December 14, 2008

FAIR GAME

Blank Check for Banks, Pink Slips for Detroit

HERE in Bailout Nation, you’ll be surprised to learn, some of us are more equal than others.

Witness the Congressional back of the hand delivered last Thursday to Detroit automakers. Chrysler and General Motors were asking for $14 billion to see them through the end of the year; the Senate said no.

Mitch McConnell of Kentucky, who leads the Senate Republicans, opposed the rescue. “None of us want to see them go down, but very few of us had anything to do with the dilemma that they have created for themselves,” he said. “We simply cannot ask the American taxpayer to subsidize failure.”

That’s a new concept — not asking the taxpayer to subsidize failure. Is that not what we just did with the banks, to the tune of $700 billion, 50 times what the beleaguered carmakers asked for?

Moreover, in the bank rescue, taxpayers are subsidizing not only failure but also outright recklessness and greed. In spite of the fact that financial institutions drove the nation into the economic ditch, and even though “very few of us had anything to do with the dilemma that they have created for themselves,” the financial industry received billions, with few strings attached.

Complaints about bailing out high-earning autoworkers are another fascinating disconnect. The supposedly exorbitant autoworker wages that get everybody so riled up pale in comparison with the riches of Wall Street.

Neither were the banks required, as Detroit would have been, to get rid of their private jets or supply Treasury with in-depth restructuring plans in exchange for bailout funds.

This is not to argue that handing money over to troubled carmakers is a good idea or without peril. (On Friday, Treasury said it would move to prevent carmaker failures until Congress reconvenes and deals with the mess.)

Rather it is to remind everyone the degree to which the banks have been blessed with a no-questions-asked bailout that will almost certainly generate tremendous taxpayer losses down the road.

YES, of course, banks are different from you and me and Chrysler and G.M. Because lending makes the world go ’round, banks need to be healthy and well-capitalized.

But the Troubled Asset Relief Program is open to banks that are both well and sickly. And nobody overseeing the program seems eager to ensure that its funds go only to those institutions that will survive and be able to pay back the taxpayer.

“Why is it that each of the carmakers needed a specific plan in hand to share in $14 billion while most of the banks only needed a large hat in hand to share $700 billion?” asked Brian Foley, a compensation consultant in White Plains. “I don’t have a sense of transparency, that there are visible accountability criteria being applied to TARP. If banks want to tidy up their balance sheets, they can go right ahead.”

As of Dec. 5, Treasury had allocated a total of $335 billion to TARP and disbursed $195 billion to institutions under its various parts.

Testifying before Congress last Wednesday, Neel Kashkari, the youthful former Goldman Sachs executive whom the Treasury Department has charged with overseeing “financial stability,” defended the $700 billion federal triage package intended to get our banks lending again.

The plan’s achievements so far, according to Mr. Kashkari: “First, we did not allow the financial system to collapse. That is the most direct important information. Second, the system is fundamentally more stable than it was.”

Maybe so. But an audit of the Troubled Asset Relief Program, released last week by the Government Accountability Office, suggests that the program’s holes are many.

For example, the G.A.O. said, Treasury has no way to determine if the program is achieving its goals of increased lending by banks. There also seems to be no monitoring of the banks’ compliance with TARP limits on executive compensation, the G.A.O. added.

Treasury should take nine actions to ensure the integrity of the TARP, according to the G.A.O. Many relate to keeping its operations transparent, managing conflicts of interest and hiring enough staff members to ensure that the program’s goals are met.

While these recommendations all have merit, there is one important item missing from the TARP to-do list: Hire tough-minded bank analysts to help determine which institutions are best positioned to use TARP funds in a way that will benefit their shareholders and the taxpayers at the same time.

Such a team could help prevent Treasury from throwing good money after bad.

According to the G.A.O., as of Nov. 21, about 48 employees were assigned to TARP. Only five are permanent staffers; the rest come from other Treasury offices, federal agencies, and organizations providing temporary help.

What is needed is a small army of TARP analysts — a lot of former bankers are out of work, by the way — to conduct a worst-case analysis of the banks’ assets and capital cushion. In private equity circles, this is called a “burndown analysis.”

Such an assessment typically involves extremely harsh loss estimates for every loan category in Year 1 and higher-than-average loss estimates for loans in Years 2 and 3, the elimination of dividend payments, and a valuation of the bank’s prospects based primarily on its deposits — not its loan portfolio.

The essential questions are these: What are the bank’s assets really worth, how much can it earn and how much capital would the bank need to operate profitably?

Bankers will object, of course. They want to keep their rosy scenarios intact for as long as they can. But such a see-no-evil approach has been central to the slow-motion nature of this train wreck. Now that the government is dispensing dollars, it is time for misplaced optimism over asset values to disappear.

Private investors looking to put money into beleaguered banks are running precisely these types of analyses. Why shouldn’t the officials who have opened the taxpayer spigot for the banks do the same?

A version of this article appeared in print on December 14, 2008, on page BU1 of the New York edition.