Jaws, the Bank Sequel

Too-big-to-fail is morphing into bigger-than-ever swallowing up failing-faster-than-ever.

The nation's largest banks, infused with taxpayer billions, are feasting on the weak as the Washington Post reports that "no consequence of the crisis alarms top regulators more than having banks that were already too big to fail grow even larger and more interconnected."

FDIC chair Sheila Bair sums it up succinctly: "It is at the top of the list of things that need to be fixed. It fed the crisis, and it has gotten worse because of the crisis."

This alarm follows news that her agency's insurance fund, which guarantees deposits, shrank another 20 percent in the second quarter, down to $10.4 billion, the lowest level since the savings and loan crisis in the early 1990s.

So far this year 81 banks have failed with another 416 on the FDIC'S "problem list."

Meanwhile, the bailout-bloated sharks are flourishing. J.P. Morgan Chase, Bank of America and Wells Fargo each now holds more than $1 of every $10 on deposit in the country. "Those three banks, plus government-rescued and -owned Citigroup," the Post reports, "now issue one of every two mortgages and about two of every three credit cards, federal data show."

As politicians debate socialized medicine, the country has moved toward a bastardized form of socialized banking, fed by the government for the ballooning profit of the few, who are squeezing out struggling smaller competitors by being able to borrow at lower interest rates while doing little to ease the consumer credit crunch, the original object of the bailout.

Now that the President has reappointed Fed chairman Ben Bernanke, the Obama economic team can get to work trying to undo some of its unintended consequences by starting to rein in superbanks with much tougher regulation.

Washington Bank Heist

Willie Sutton said he robbed banks because that's where the money is, but it was never their money. They only handle and maneuver it around, like parking lot attendants.

Yet, according to Sen. Dick Durbin, after smashing up financial vehicles and taking taxpayer billions for repairs, when it comes to the US Senate, banks "frankly own the place."

As he tried unsuccessfully to line up votes to help avoid foreclosures in bankruptcy, Durbin told voters that though it's "hard to believe in a time when we're facing a banking crisis that many of the banks created," they "are still the most powerful lobby on Capitol Hill."

In the lull before the Obama Administration announces results of bank stress tests, there is growing sentiment for getting tougher on the keepers of the keys.

Sheila Bair, head of the FDIC, in a speech this week called for an end to the "too big to fail" philosophy that has allowed banks to hold a gun to the government's head.

“Taxpayers," she said, "should not be called on to foot the bill to support nonviable institutions because there is no orderly process for resolving them.”

The President himself foresees an end to "the massive leveraging and the massive risk-taking that had become so common," but his economic team so far has been tiptoeing around the banking industry and their Wall Street cousins, hoping to bribe and cajole them into less greed and more responsible behavior.

The time is coming to sweep out the parking lot and get new attendants who can remember who really owns the money they keep jockeying around for their own profit.

Upcoming: Ultimate Bank Bailout

As piecemeal rescue plans sputter, Washington is moving toward a consensus on a huge public-private partnership to strip banks of bad assets and get them moving again.

Like spoiled children of families facing hard times, financial institutions have whining about their allowances and the chores they have to do to earn them. Some are stamping their feet and returning or refusing to take the money.

In the face of public outrage, the government has been demanding more and more reform--delaying evictions and modifying mortgages for strapped homeowners, letting shareholders vote on executive pay packages, cutting dividends and canceling expensive junkets.

As banks reach out for help but complain about the strings, the outline of a simpler but more drastic approach is taking shape, as Sheila Bair, head of the FDIC, and others have been suggesting in recent days.

The government would partner with private investors to buy troubled assets, in part by providing financing at low cost. Federal officials are debating the amount of the subsidy that would allow investors to pay higher prices, limiting the losses that banks would record but also exposing taxpayers to greater risk.

"You end up with two healthy institutions," Bair contends. "It's not a good bank and a bad bank; it's an aggregator bank with good upside potential because it bought at good discounts and you've got a clean balance sheet over here with an opportunity to raise private capital."

But critics like Paul Krugman will take a lot of convincing. He contends that "by using taxpayer funds to subsidize the prices of toxic waste, the administration would shower benefits on everyone who made the mistake of buying the stuff. Some of those benefits would trickle down to where they’re needed, shoring up the balance sheets of key financial institutions. But most of the benefit would go to people who don’t need or deserve to be rescued."

In any event, when the administration decides on the right formula, perhaps in the next week, the Ultimate Bailout will be unveiled for a global vote of confidence--by investors, politicians, the financial industry and world markets. That tally will tell us much about where the economy is headed and for how long.

Bailouts: The Game Show

TV news is beginning to look like the mother of all game shows with Washington contestants competing to pick a jackpot for the economy.

Here is Henry Paulson wavering between the curtains marked Toxic Loans and Bank Capital, some members of Congress wanting to take a flyer on Detroit, Sheila Bair of the FDIC choosing Foreclosure Relief as the audience of lobbyists cheers them on and the rest of us wait anxiously for someone to come up with a winner.

Mitt Romney, whose family money comes from the car industry, shows up today to opt for Big Three Bankruptcy while a nearby New York Times editorial urges Congress to open the curtain marked Modifying Home Loans.

The Bailout Show so far is not getting stock-market ratings like the Neilsens of such classics as Deal or No Deal, but changing the host in January may make a difference. Meanwhile we're all watching, remote in hand, hoping that no one shows up to repossess the TV set.

So far, the show looks far from ready for prime time.