This editorial appeared in The Kansas City Star.
When Congress approved $700 billion for the Troubled Assets Relief Program, or TARP, it was on the assumption that the money would be used to buy toxic assets from troubled banks so they could start lending again.
Instead, many of the initial outlays went for bank recapitalization. Now the Obama administration is trying to come up with a more comprehensive plan for dealing with the problem.
Published reports say officials are revisiting the original concept of TARP. But instead of having the Treasury Department hold toxic assets, they would be sequestered in a so-called "bad bank," or "aggregator bank." In addition, the plan would also extend a guarantee against losses to some of the assets remaining on bank balance sheets.
The plan will be extraordinarily expensive. Cost estimates in the trillions are being bandied about.
But the main point is that something must be done before the nation's banking system deteriorates further. As long as the toxic assets are on the books and the housing slump and recession continue, those assets must be continually written down, eroding the capacity of banks to lend.
Another point regarding the assets that would move to the "bad bank." Once the government gains ownership, many of these mortgage securities could be rewritten to prevent foreclosures. That's what the Federal Deposit Insurance Corp. is doing in the case of IndyMac, a failed lender that the FDIC acquired last summer.
To read the complete editorial, visit The Kansas City Star.