TARP reform: Obama's first test

Lest we fall into the trap of believing that political pork and self-dealing went out of favor when the Republicans left Washington, I want to point out a very telling article in tomorrow's Wall Street Journal. As the Journal article makes clear, pork is non-partisan--especially when it comes to the chowing down at the huge trough created by the U.S. Treasury's Trouble Asset Relief Program or TARP.

In the article you will read how several congressmen, including Rep. Barney Frank, chairman of the House Financial Services Committee, used their influence to make sure their pet banks benefited from the government's largess--even banks that didn't qualify under the Treasury's already diluted standards. One such bank, the troubled OneUnited Bank in Boston, had tier 1 capital of only 1.8% (well below 6% desired by regulators) and had been hit with a strong enforcement action from the FDIC and Massachusetts regulators last October for "poor lending practices and executive compensation abuses." OneUnited was clearly outside the Treasury's vaguely stated criteria of investing only in healthy banks. This didn't stop Barney Frank from personally shepherding OneUnited Bank through the approval process, however. In the end, OneUnited received a $12 million injection from TARP.

Some critics complain that the investments are doled out arbitrarily and that you need to have the right Washington connections. According to the article, the Congressional Oversight Panel, the group charged with monitoring the administration of TARP funds, complains that "the process for allocating money lacks transparency and accountability. The Treasury declines to explain why one bank is chosen for a federal investment and not another." Its all in the article and it's worth reading.

I bring it up here because I think TARP reform represents the clearest chance for the new president to show that it will not be "business as usual" in an Obama Washington. The country--even the world--is looking to this Administration to be something different, something special. Cleaning up this mess and making the process more transparent and less political will send a confirming signal to the world that the U.S. really is ready to lead again. This kind of leadership may well be the most effective mechanism for initiating a global financial sector recovery.