H.R. 384 - Rep. Barney Frank's medicine for the Troubled Asset Relief Program - was introduced on January 9 and passed the House in 13 days, something approaching the speed of light for Congressional action. One hitch, though was that the Senate had no plans to consider the bill. Meanwhile, momentum was building at the other end of the Mall for the creation of a bad bank designed to sanitize the financial sector by aggregating damaged securities.

The Senate's public disinterest did not make H.R. 384 irrelevant, however. The TARP Reform and Accountability Act is regarded as a guide to how the Obama administration might structure the remainder of TARP money released by the Senate. H.R. 384 would provide at least $100 billion to homeowners facing foreclosure, provide a big chunk to mandated lending, and handcuff executive compensation.

"There's a saying that bad facts make bad laws, and trying to respond to crises makes bad policy," says John Douglas, chairman of the banking and financial group at Paul Hastings and former general counsel of the Federal Deposit Insurance Corp. "But you have to recognize that Treasury, the Fed, and to a lesser extent the FDIC have been trying to hold the financial system together - you have to give them credit for trying."

Douglas cites several flaws in the efforts thus far. "First, the government has put all this money into the banks but has yet to address the asset side of the equation," setting aside what to do with banks' toxic elements.

"You've also created a situation where government is both an owner and a regulator, and trying to use its position as an owner to force policy changes," with the institutions. The government now owns significant chunks of institutions from the original TARP funds, he adds. "Can you ever stop? Probably not." There's not a finish line to when the cleanup is complete.

H.R. 384 "is forcing a rethinking of TARP," says Stuart Stein, partner and head of the financial service groups at Hogan & Hartson. While the unraveling of the financial sector demanded government response, "they threw things at the wall" without thinking the measure through, Stein complains. The Capital Purchase Program "wasn't even debated - Congress is saying wait a minute, what did you do? Congress didn't have a clue what was happening at Treasury. Now they want a seat at the table."

Stein believes the Obama team will focus on foreclosures and toxic assets.

The latter idea troubles veteran stewards of financial rescues.

Bill Seidman, the FDIC chairman from 1985 to 1991 and the first chairman of the Resolution Trust Corp., sees a paradoxical knot in the bad-bank plan. "The basic hurdle is they have got to figure out what price to buy things," he says. "If the price is too high, it's a gift to shareholders and bondholders. If too low, the bank is liable to be insolvent as a result of selling."

William Isaac, the preceding FDIC chairman from 1981 to 1985, questions how any resolution comes without tackling what he sees are banks' "fundamental problems" in mark-to-market accounting and inaccurate capitalization measurements. The best use of rescue funds so as to kickstart lending, Isaac believes, is to give banks added capital, not clean slates. "If you take a dollar of bad loans out of the bank, what you've done is you've freed up a dollar of lending capacity," says Isaac. "If you put a dollar of new capital in that bank, you've created $10 in lending capacity."

Stein believes that in Obama's plans there will be a "combination of assets sales, where pools of investors take participation in packages of assets, and in some aggregator entities, whether they are banks or LLCs. The problem is too vast and too deep for a single solution."

And the price tag will be numbing. "A couple of trillion dollars for the top 10 banks, and another two, three, or four trillion for the rest of the banks," Stein predicts. Buying these assets at fair value or at-par would be bad approaches, he says. Mark-to-market prices would be "super low and artificially depressed, and would crush the capital value" of banks involved, while buying them at-par would translate into "propping up false values," a tactic that brought Japan a "lost decade." Instead, Treasury could sweeten the assets for investors, through "government cleansing, stop-loss guarantees, and other help," says Stein.

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