Bloomberg reports “Summers Says TARP to Be ‘Very Different’ Under Obama.” The director of the White House’s National Economic Council stressed transparency, accountability; and the push for banks to leverage TARP funds into consumer mortgages and car loans. Larry Summers said that the Obama Administration was not out to benefit financial institutions, but “of course we need to stabilize financial institutions -- without a stable financial system the economy can’t work.” Summers refused to provide any detail on President Obama’s plan or even philosophy for strengthening financial institutions until after New York Federal Reserve President Timothy Geithner is sworn in as Treasury Secretary. I guess with Geithner the Senate will be voting on a "pig in a poke".

While the Administration is getting its lipstick ready, I would like to suggest dramatic policy change that would jumpstart private investment in our banking and insurance systems. The Treasury, FDIC and Federal Reserve should raise the strike prices on the warrants they received for TARP and other programs to the estimated value of these companies in normal times. If a conservative estimate of a shrunken Citigroup (C) in normal times would be $20 per common share, investors would know the government would not dilute until the shares reach that level. Above that level it would be an opportunity for Citigroup to raise capital from whoever bought the warrants from the government. This would end the fears of nationalization and cause a short squeeze as the shorts attempt to cover. Moral hazard on the shorts – what a concept!

Raising the government’s strike price would do more to prevent short raids and build investor confidence than restoring the uptick rule and temporary bans on short selling. I think that it would be even more powerful than the mortgage loss backstops that were provided to Bank of America (BAC), Citigroup and to a lesser extent JP Morgan (JPM).

The Treasury, Fed and FDIC did consider open market common stock purchases to raise Citicorp’s stock price and improve confidence during the last rescue. But they determined that the amount required to move the market would be equivalent to nationalizing the company.