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TARP II: No Change to Believe In

At 2:30 p.m. today, Treasury Secretary Tim Geithner is scheduled to appear before a Senate panel to testify about the Obama administration’s strategy for spending the second $350 billion of Wall Street bailout funding. This is important because the Bush administration, it’s widely agreed, frittered its share by providing little supervision over where the money went and generally allowing the bailed out banks to use the money as they pleased. (Here’s a hint: They haven’t been lending it.)

But if The New York Times preview of the Treasury’s Troubled Asset Relief Program strategy is any indication, the second $350 billion might disappear down the same Wall Street worm hole as the first — and it appears we’ll have Geithner to thank.

From The Times:

The Obama administration’s new plan to bail out the nation’s banks was fashioned after a spirited internal debate that pitted the Treasury secretary, Timothy F. Geithner, against some of the president’s top political hands.

In the end, Mr. Geithner largely prevailed in opposing tougher conditions on financial institutions that were sought by presidential aides, including David Axelrod, a senior adviser to the president, according to administration and Congressional officials.

Mr. Geithner, who will announce the broad outlines of the plan on Tuesday morning, successfully fought against more severe limits on executive pay for companies receiving government aid.

He resisted those who wanted to dictate how banks would spend their rescue money. And he prevailed over top administration aides who wanted to replace bank executives and wipe out shareholders at institutions receiving aid.

And there’s more:

Abandoning any pretense about limiting the moral hazards at companies that made foolhardy investments, the plan also will not require shareholders of companies receiving significant assistance to lose most or all of their investment. Some officials had suggested that the next bailout phase not protect existing shareholders. (Shareholders at most banks that fail will continue to lose their investment.)

Nor will the government announce any plans to replace the management of virtually any of the troubled institutions, despite arguments by some to oust current management at the most troubled banks.

Finally, while the administration will urge banks to increase their lending, and possibly provide some incentives, it will not dictate to the banks how they should spend the billions of dollars in new government money.

And for all of its boldness, the plan largely repeats the Bush administration’s approach of deferring to many of the same companies and executives who had peddled risky loans and investments at the heart of the crisis and failed to foresee many of the problems plaguing the markets.

In internal discussions, Mr. Geithner is said by officials to have raised the lessons of countries that forced banks to make loans and adopted other, more interventionist measures. Those strategies, he said, wound up costing more and undermining their governments’ credibility. He concluded the wiser course would be to provide economic incentives to encourage lending.

The House has already passed legislation that would put tighter restrictions on TARP spending, but the Senate leaders — including Banking Committee Chairman Christopher Dodd (D-Conn.) — decided not to go that route, arguing instead that promises of responsible spending from the Obama team would suffice.

One wonders if Dodd will change his mind after today’s testimony.

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