The government rescue of an entire industry felled by greed and poor leadership, however, becomes an expensive quagmire, which is what TARP is proving to be.

After LTCM’s rescue, the Cleveland Fed reviewed the Federal Reserve’s action.  The number one lesson learned:  Context matters.  Large losses at a financial firm do not by themselves create a need for Federal Reserve action; the losses must have a systemic component.

While one could argue that the failure of the big three would worsen the unemployment significantly and cause a spate of follow-on bankruptcies, the orderly unwinding of the auto manufacturers still does not pose the same kind of systemic risk that failure of the major U.S. commercial banks would have.

A bailout for the Big Three also would not force the kind of changes that domestic auto manufactures need but which a pre-packaged bankruptcy plan created outside a courtroom might.  More importantly, it would prevent the obvious scenario a few months from now when the auto industry comes back for an even bigger handout.

The financial services bailout is exhorbitant, messy and rife with moral hazard.   It was also necessary to avoid a meltdown of world financial markets.  Unpalatable as a bailout for financial services is for the country, replicating it for the automakers makes no sense.

The problem with Capitalism is that when it doesn’t work, everybody expects a quick fix.

My original thought in September was that the U.S. government should never bail out financial institutions, especially using taxpayer money.

But the Treasury can’t undo what’s been done, they can only consider what TARP is actually doing to relieve a one-year-old recession and a tumorous financial crisis.

If you ask me — and I’m sure if asked Adam Smith — Corporate America needs to lean from its mistakes and accept that a free-market economy has its pros and cons. The more we soften the collapse of embattled corporations, the less likely those business will ever make genuine changes in how they run their operations or how they cut corners to make a bigger profit.

And the more our government tries to clean up the mess, the more likely future generations of American consumers, businesses, banks and investors will make the same mistakes.

The intervention between JP Morgan and Bear Sterns was tolerable. It was less a bailout in my view than an aggressive push. But it also flipped open a Pandora’s Box.

TARP is becoming a well-recognized mistake and any similar initiatives given to the auto industry would show equally lame results. Yet the Big Three have their open palms out now.

Goldman is sinking. Citi is imploding. And U.S. taxpayers are out $700 billion. Why would Ford, GM and Chrysler prove any different?

Here’s a solution: Take all that bailout money, put it towards education and start teaching finance and economics to kids in elementary school. Make it part of the core curricculum in all public and private schools all the way up to high school.

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.

A bit of an understatement on the day that the Dow dropped another 733 points, eh?

Peter Goodman at The Times noted Mr. Bernanke also made this curious observation at his Economic Club of NY appearance:

The real concern that we have is that we have got and developed, in this country, a very serious ‘too big to fail’ problem. And that problem, we’ve just recognized now in the current situation, how severe it is.

Just recognized? That’s right. I forgot the banks just kinda merged themselves.

Or has this all just been a red scare?

These cartoons of Comrades Paulson and Bernanke come courtesy of Bill Perkins, 39, a Houston-based venture capitalist at Small Ventures USA who has run all three as full page ads in the New York Times and other media recently.

Sez Stephen Colbert: “Garfield, the bar has been raised.”

The story goes that Perkins had made $1.25 million betting that Goldman Sachs had better fundamentals than its peers. He cashed out after Paulson announced the bailout plan and pledged to use his gain to campaign against the bailout.

“The stock did OK because the government came in and said, ‘No one can fail,’” he told the Journal. “It’s capitalism on the way up and communism on the way down.”

He commissioned an art collective called Otabenga Jones & Associates to draw cartoons for the campaign.

Why cartoons?

“I felt like a bunch of words on a piece of paper – people wouldn’t read, but with a picture, people get it right away,” he said.

Of course, the bailout passed anyway. And the government could yet commit hundreds of billions more to banks.

In an email, Perkin’s assistant said that they are considering the possibility of running more ads, but haven’t finalized anything at this time.

I hope they do. I’m fed up with the NY Times not having a comics page.