A $1 Trillion TARP

The failure of the banking and credit systems are happening faster than most analysts had predicted. RBC Capital yesterday predicted that 1,000 banks could fail in the US over the next two years.

Large cap banks stocks have recovered some, but still trade near multi-year lows. The skeptics are not willing to buy the shares.

According to Bloomberg, “President Barack Obama signaled he would be open to seeking an expansion of the $700 billion financial-rescue program should the plan fail to restore stability to the U.S. banking system. ”

The first $350 billion of TARP money, spent by Henry Paulson, was swallowed whole by the banking system and did not appear to satisfy its need for capital at all. Citigroup (C) and Bank of America (BAC) still ran into significant financial trouble and some experts  believe that the government will have to set up a “bad bank” to take their toxic assets so they do not fail.

On top using the $350 billion left in the TARP fund to put more capital into banks and perhaps back stop the value of distressed assets, the Congress and Administration would like to see more money put toward giving credit relief to mortgage-holders, consumers and businesses. No one has put a number on this, but the IMF has said  bank write-downs for toxic assets will top $2 trillion before the crisis is over. A very large portion of that will hit US banks.

With the banking system in a flat spiral, the next $350 billion is almost certainly not enough. A $1 trillion TARP is a real possibility.

Douglas A. McIntyre