For months I blogged about a disconnect with the Troubled Asset Relief Program’s ambitious financial rescue plans and its lack of much remaining money. But, gosh, report Binyamin Applebaum and David Cho of the Washington Post, everything now is just hunky dory after the bank stress test results were announced:

Officials overseeing the federal bailout suddenly find themselves flush with cash, just months after saying they might run out. Rather than needing to spend what remains in the bailout to shore up weak banks, some government officials say they now expect the healthy ones to return well more than $35 billion. That would give the Treasury Department at least $145 billion for other initiatives.

Obama administration officials do note that there is the matter of still rescuing General Motors, Fannie Mae and Freddie Mac. But the administration is giddy enough to talk about expanding the scope of the TARP program — maybe bailout life insurers or give cheap loans to cities, school systems and hospitals. Maybe take off more toxic assets from bank balance sheets.

But the Wall Street Journal’s David Enrich, Dan Fitzpatrick and Marshall Eckblad report out the suspicions of many: the conclusion that banks need a combined $75 billion more in capital was reached after several concessions to individual banks and use of a bank-friendly funding formula:

On Friday, some analysts questioned the yardstick, known as Tier 1 common capital, that regulators chose to assess capital levels. Many experts had assumed the Fed would use a better-known metric called tangible common equity.

According to Gerard Cassidy, an analyst with RBC Capital Markets, the 19 banks’ cumulative shortfall would have been more than $68 billion deeper if the government had used the latter metric, which accounts for unrealized losses.

But even with the Tier 1 formula, banks still weren’t satisfied. So the Treasury Dept. and Federal Reserve re-negotiated the numbers. Instead of needing to raise $50 billion, Bank of America would now only have to raise $33 billion. Under fear of a lawsuit, the Fed dropped Wells Fargo’s capital hole from $17.3 billion to $13.7 billion. Citigroup, meanwhile, saw a $29.5 billion drop from $35 billion to $5.5 billion.

The Journal’s expose need not suggest the Obama administration has been dishonest about the stress tests or even incompetent. But it does lay bare the political horse-trading and how arbitrary the authoritative-sounding $75 billion figure was. Government does a lot of great, hard-hitting audits on matters from Iraq to Hurricane Katrina to even the financial crisis. The stress tests, though, were more of a compromised piece of legislation than an audit.

Instead of abandoning the Bush administration financial rescue plan, the Obama administration has doubled down on TARP. With utterly no long-term vision for how TARP will contribute to a more stable economy, the program must rely on better, more consistent management and a lot of luck.-MB

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