How to Cover Wall Street

Treasury Secretary, Henry Paulson, is trying to save the financial system. But the Treasury’s Troubled Asset Relief Program or TARP cannot fund all of the financial institutions that have applied for it.

Regulators for the Treasury have announced that the agency expects at least 1,800 publicly-held financial institutions to line up for their piece of the $700 billion bailout designed to rid banks of toxic assets.

Paulson moved quickly to shore up the financial services sector in the midst of a meltdown. And, to date, Treasury plans to divide $33 billion  among the nine largest US banks and 16 regional banks. But the Treasury Secretary may have opened up a Pandora’s box since, now, almost any financial institution can apply for a piece of the pie.

Lawyers for firms such as New York City-based Jones Day, are advising banks that TARP money could strengthen their capital ratios against those of their competitors. And attorneys for super firms such as Skadden, Arps, Slate, Meagher and Flom, which is also based in New York City, are now working overtime to help banks build up their capital ratios and, thus, guarantee TARP approval.

TARP was designed to get “healthy” banks to dump risky securities and get their balance sheets back in order. Treasury would absorb 3 percent or up to $25 billion of these assets. Participating banks would give the agency equity stake in the company and everybody would be satisfied. But when financing companies such as, say, GE Capital or GMAC come calling, one has to ask who gets the bailout billions first: Will it be the banks? Or will Treasury make decisions based on the power of a particular lobby, say, that of the auto industry?

So now, with so many hands out and rumblings throughout Congress, Treasury has two options: Make TARP funds available to any financial institution that applies for it or turn some institutions away and risk appearing ineffective.

The good news is that the Treasury, as the lender of last resort, is putting up the cash to inject some confidence into the country’s battered economy. That could mean a speedier end to what many fear will be a protracted recession.

The bad news is that the same agency has yet to draft the conditions that will determine which entities can and cannot to participate in the Troubled Asset Relief Program or TARP. Treasury may expect 1,800 institutions to come looking for handouts. But many more may find themselves eligible to receive taxpayer money. And few banks, thrifts, insurers or financial institutions of any stripe would be magnanimous enough to turn their backs on a few billion in, essentially, free capital.

Neither Paulson nor the interim chief of the U.S. Treasury Department’s financial rescue plan, Neel Kashkari has issued a statement on how the bailout money will be allocated. But, two more weeks left in the filing period, it is likely that they are working feverishly to figure that out.