What if the Government Bailout Fails?

The New York Times - Trust is a precious thing, and the banks still don’t have much of it. Not from the public, and not from one another.

The government’s latest bailout plan — to invest $250 billion in banks with few strings attached — could help restore that trust. But it will succeed only if the government is able to make it clear that those investments confer a sort of “Good Bookkeeping” seal of approval.

That will depend on whether the government makes sure that the cash goes only to banks that are in decent shape, or at least will be after they get the cash.

By committing half the money to nine large banks, the Treasury Department presumably has taken care of most, if not all, of the banks whose failure would threaten the system. Now it has the chance to carefully go over the books of banks that apply to join the bailout club.http://www.nytimes.com/2008/10/17/business/17norris.html?partner=permalink&exprod=permalink

The signs of possible distress that the government should look for go far beyond toxic mortgage securities and credit-default swaps. Many smaller banks were not invited to those parties, and therefore suffer no hangover from them. But real estate construction loans, both for homes and commercial buildings, were far more prevalent in banks all around the country. Credit card losses are looming as unemployment rises.

It will take weeks, if not months, for the government to prove that it will invest the money wisely. But so far, it has not even made clear that it is determined to leave out the bad banks.

Treasury officials say they have not made any decisions on what criteria will be used to decide which banks are allowed into the program, other than to consult with regulators. That is probably true; the government’s frantic efforts to halt the slide in recent weeks have had a “ready, fire, aim” feel to them.

Or, in the gentler words of the Federal Reserve chairman, Ben S. Bernanke, “Our strategy will continue to evolve and be refined as we adapt to new developments and the inevitable setbacks.”