The bad news keeps piling in:

• $150 billion commitment to a non-bank, AIG
• GE Capital (which is not a bank) gets FDIC Insurance backup for $139 billion
• American Express and CIT Group are now banks – I guess everyone is a bank
• Wachovia shareholders being urged to reject the Wells Fargo deal so Wachovia could apply for Treasury dough
• Hartford Financial agrees to buy Florida bank for $10 million to get access to $3.4 billion in TARP funds (now there’s a return on an investment)
• Autos looking for some loot too

It is like children in the candy store – ironically, as our economy accelerates its downward spiral.

Let’s start with the $700 billion Troubled Asset Recovery Program – or TARP. It is now referred to as TARP rather than by its full name – guess for good reason. Secretary Paulson today announced that:

“Over these past weeks we have continued to examine the relative benefits of purchasing illiquid mortgage-related assets. Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources, in helping to strengthen our financial system and support lending. But other strategies I will outline will help to alleviate the pressure of illiquid assets.”

Basically, the TARP is not being used as a TARP. If you recollect, Congress and President approved massive emergency legislation. Testimony focused on getting the troubled assets off the balance sheets of financial institutions.

This is a stunning about face.

It is like passing a bill to invade Iraq and landing in Iran instead.

I have been strong critic of how the TARP was to be implemented. The flaw in the TARP was the Treasury’s intention to buy troubled assets at “hold to maturity” prices. This distorts market prices and bails out banks that took bad risks. It throws good money at bad.

But to completely eliminate TARP is not the solution.

I advocated a two-pronged approach.

In the first prong, troubled assets would be purchased from viable financial institutions at a price that reflected a recovery in credit markets. This price would be above fire sale prices but well below “hold to maturity” prices. Financial institutions would be pleased to sell at these prices and the prices are sufficiently low that taxpayers would have a good shot at earning a positive return.

In the second prong, equity capital is injected into viable financial institutions. This capital serves to jump start the credit system.

Notice that I carefully chose my words. In the first prong, we purchase assets from viable financial institutions. In the second prong, capital is injected into viable financial institutions. There is no sense throwing good taxpayer money at bad. For those institutions that are below the margin, relegate them to an RTC-II and dispose of the assets.

You need both prongs. If you cancel the first prong (as it seems was done today), the equity injection will simply be used to reduce risk. That is, the banks get the capital and they hold it in a liquidity reserve. They do not lend it out (or they lend out a trivial amount). It fails to jump start the system.

In cancelling or delaying the first prong, the Treasury has blunted the effectiveness of this policy initiative.

The TARP initiative is in disarray. Given how it continues to morph over time, it is actually inducing uncertainty – rather than reducing it. We have taken a step back rather than forward.

And now, everyone is at the trough hoping for a dole out.

The State Treasurer of North Carolina was on CNBC today saying that the takeover of Wachovia by Wells Fargo was “highway robbery.” The Wachovia shareholders should reject the deal and hope for some TARP money, he said.

Uhhh, let’s review a few facts. Wachovia was a troubled institution. It took a big bet on Golden West in 2005 and that bet did not pay off. It was only a matter of time. A deal was engineered so that Citi would buy Wachovia for $2.1 billion. Citi would cover up to $42 billion of bad assets. The FDIC would cover the rest of the portfolio ($270 billion). The Treasury got $12 billion in equity. That was September 29.

On October 3 (same day the TARP was signed into law), the deal was reneged and Wachovia’s Board agreed to sell to Wells Fargo for $15.1 billion — with no government guarantee. This deal was hugely better for shareholders ($7 per share was the price).

Now, you want the shareholders to reject the deal – and go to the TARP trough? It seems extremely unlikely that the Treasury would approve even one nickel if Wachovia reneged on two deals!

But I understand the State Treasurer’s motivation. Dole out to us too. Why should AIG get $150 billion and Wachovia nothing?

The autos too.

Why focus all the money on Wall Street? What about Main Street?

This is a good point. But what will the money do? It will definitely buy some time for the autos and it will definitely save some jobs in the short term. Both of these are good things. However, the money does not address the (well-known) structural problems. The U.S. autos have consistently underinvested in R&D and paid their employees (both blue and white collar) so much that they are globally and domestically uncompetitive. Going to the TARP trough just delays the inevitable. It does not address the causes of the problem.

Why stop at the autos? As the economy worsens, there will be a whole swath of firms wanting a piece of the action.

Why cancel the purchasing of troubled assets? A simple reason might be that they will run out of the $700 billion very soon.

We are in need of a coherent and consistent policy that focuses on the structural causes of the current crisis. Right now, it looks more like a feeding frenzy. The trough will soon be empty. What then?