We plan to cover this more extensively, since it is at the forefront of market concerns.  To get started, here is a summary of the situation.

Monday's Bernanke speech at the London School of Economics raised the  key  point-- the need to address troubled assets at banks, the original TARP concept. We are all getting an object lesson in what happens when valuation of financial assets becomes nearly impossible.  Despite evidence to the contrary, including the initial Bear Stearns assets, media coverage labels anything related to mortgage holdings as toxic waste and nearly worthless.

There is universal criticism of TARP since the banks "are not lending." Their required regulatory capital continues to be at risk whenever some other institution sells an asset. Until we address this problem, existing bank assets will disappear faster than we can thrown new TARP money at the problem.

Many vocal observers, including Meredith Whitney, insist that banks should disgorge these assets for whatever price they can get.  Rick Santelli, gaining stature at CNBC, endorses writing assets down and adding capital, whatever the cost.  Santelli is a champion of traders, so his viewpoint reflects most of those driving the market.

Is there an Alternative Solution?

The political pressure is to do something for Main St., since TARP One was for Wall St. Political compromises address root causes only by accident. It is not an analytical process. Bernanke is trying to refocus attention on the causal relationship between troubled assets and future lending. It is exactly what I wrote my own open letter to the President-elect the day after the election. Two months later, the need is becoming more obvious.

There are three good alternatives.  Investors should watch for some sign that any of the three is getting traction.

1. Suspend mark-to-market accounting, at least through the crisis.  Information about individual companies could be revelaed in SEC filings without forcing changes to regulatory capital.  This approach was rejected by the Bush SEC, but is likely to be raised in confirmation hearings for the Obama appointees.

2. Use TARP II for price discovery.  That is the message of our letter to Obama.  We beat Bernanke to the punch by two months.  Many rejected the idea in favor of public investment in banks.  How is that working out?

3. Adopt a good bank/bad bank approach.  This would put the troubled assets into one account, with government involvement.  It would permit resumption of normal bank lending.

Conclusion

This problem will not be solved until policy makers start to address causes rather than effects.

We are moving to a model where we make public investments in private companies, creating tension between the profit motive and regulatory oversight.  We are  engaged in instructing companies about salaries, bonuses, private planes, and mergers.  This is not a good task for Congressional oversight, since committees are not good managers.  Who knows best what it takes to get good managerial talent and to use it effectively?

Government aids private business best when it creates financial incentives, solves financial problems, and allows managers to manage.  Consider the examples of Fannie, Freddie, Amtrak, and the Postal Service.

Here at "A Dash' we emphasize investment knowledge rather than policy prescription.  Sometimes the two themes are congruent.