Making The Banksters Squirm

The entire way that Geithner and Obama have been going about bailing out the banks at all costs has made me uncomfortable, but judging from today's Opinion piece in the Wall Street Journal, there is one thing they've gotten right: if losing bazillions of dollars isn't enough to scare the bejeebers out of the banksters and make them prudent, then maybe the spectre of government control is:

In the wake of the stress tests, the weaker banks will now have six months to raise private capital to fill the hole identified by Treasury. They'll be desperate to do so, because the alternative is that Treasury will force them to accept more public capital. This will include the conversion of Treasury's preferred stock, bought last year via the TARP, into common shares.

Under accounting rules, this gives the banks more "tangible common equity," the measure of capital favored by Treasury. Yet it provides not a penny more in actual capital to absorb losses. Meantime, the feds would suddenly own big chunks of those banks via common stock, the way they now are the largest shareholder in once-proud Citigroup. We've called this a back-door nationalization, and it means Congress looking over banker shoulders. The silver lining is that bank executives are now so appalled by this idea that they'll sell anything that moves to avoid such a fate.

As for the "stronger" banks, a major goal will be to flee as fast as possible from the TARP, also known as the Hotel Geithner. Banks can check in but it's a lot harder to check out. Treasury has set up major hurdles before a bank can escape, even if it wants to. Clearly banks at risk of failing can't be allowed to endanger the larger financial system, but banks that have adequate capital shouldn't be held hostage to the political worries of regulators.

The best that can be said about the stress tests is that they're over. Now the most urgent task is to get back to a financial system free of government guarantees, public capital and political control.