The Financial Stability Plan (FSP) that was announced by Secretary of the Treasury Tim Geithner has some good elements in it, but is still lacking in specificity in a number of key areas. To see the fact sheet on the plan go to: http://www.financialstability.gov/docs/fact-sheet.pdf

Among the better aspects of the plan are rules that limit common dividends to no more than $0.01 per quarter for firms that receive exceptional assistance, although the definition of "exceptional" was not specified. There is, however, a presumption that any bank receiving TARP 2.0 funds will also have their dividends restricted.

There are also restrictions on share repurchase and acquisitions, although exceptions might be made by the banking supervisors. I think that would mostly be in cases where the FDIC shuts down another bank and is looking for someone to take over the branches and deposits.

The compensation restrictions are disappointing since they appear to only cover a handful of the top executives, but the "say on pay" shareholder votes are a good step, as is increased disclosure. Banks which receive money under the FSP will also have to work on foreclosure mitigation, under guidelines that the Treasury will issue. It would have been nice to have at least a rough outline of what those guidelines will be.

It also looks like there will be substantially increased transparency relative to TARP 1.0, but that is not a hard step to achieve. TARP 1.0 was about as transparent as a one-foot-thick lead wall -- not even Superman could have seen trough it. Banks will have to report to the Treasury how they are using the funds and what sorts of loans they are making. The government will then post much of that information on the web.

Perhaps the biggest part of the plan is a huge expansion of the Term Asset-backed securities Loan Facility, or TALF. The Treasury plans to inject $100 Billion of capital for this plan to the Fed, and that will then be leveraged 10:1. Where the Fed gets the other $900 billion is not specified, but the implication is that they will print it.

In essence, the Fed will start to play part of the role of a commercial bank, rather than a central bank with this step. It is taking on credit risk, although it will only be taking on newly packaged AAA portions of these pools of credit card, auto and small business credits.

Well, we have seen in the recent past just how useful the AAA, rating is, especially for asset-backed securities. Many of them took the AA 12-step program downgraded by 12 steps when they were faced with a higher power: the market.

The new TALF will also be expanded to include commercial real estate mortgage-backed securities. While this portion of the plan does involve a serious risk to the taxpayer, and taking on credit risk has always been a huge no-no in central banking, it should be fairly effective in getting credit flowing back to the real economy.

It is also envisioned that there will be a public-private partnership program where the Treasury invests side by side with private capital in buying the toxic assets that are currently on the banks' balance sheets, with the private sector part of the partnership determining the pricing of these assets.

In theory this sounds like a very good idea, but the devil is in the details, and there are few demons to be seen. This part of the program needs to be seriously fleshed out before we can tell how effective it will be.

All in all, the FSP seems to be more of a work in progress than a final plan, an outline at best. For now we would continue to avoid the banks, especially the mega banks like Citigroup (C) and Bank of America (BAC). We would also avoid most of the major regional banks like Key Corp (KEY), Fifth Third (FITB) and Comerica (CMA).