Banking Law

Whatever Mark Zandi's smoking, I want a toke.

Testifying today before the Congressional Oversight Panel that "oversees" the Treasury Department's TARP, Mr. Zandi made a bold assertion.

Mark Zandi, the chief economist and cofounder of Moody?s Economy.com, said that banks were ?overcapitalized.?

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Zandi testified that the most effective aspect of the TARP program has been the use of funds to provide capital to the banking system. The Treasury committed $205bn through the Capital Purchase Program (CPP) to recapitalize the banking system and another $115bn to support AIG, Bank of America and Citigroup, Zandi said.

?The most successful part of the TARP program has been the CPP,? according to Zandi?s testimony. ?Without capital injection from the federal government, the financial system would have likely collapsed.?

Zandi said that the while the financial system is not functioning normally, it is stable.

?The stress test conducted earlier in the year was substantive,? Zandi said. ?Once housing prices stop falling and unemployment numbers go down, lending will go up.?

Mr. Zandi's views were not shared by others, especially his opinion that banks are "overcapitalized."

?That?s laughable,? responded Charles Calomiris, a professor of financial institutions at the Columbia Business School.

I had a bank insider who read this same article call me this afternoon and express the similar sentiments, albeit a bit more "robustly" than Professor Calomiris did. On the other hand, he agreed wholeheartedly with Calomiris' comments about regulatory "overkill."

?In my conversations with banks, it?s widely believed that some of the banks are insolvent,? Calomiris said.

He did not want to go on the record to say which banks will fail, but he did say that one bank is insolvent. Regulators, he said, are playing political games with capital requirements and are creating an ?overkill? environment.

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?Capital scarcity persists,? Calomiris said.

Whatever "games" are being played are not amusing the banks. Instead, they're alternately dismaying and enraging them. Moreover, the end result of some of those games is to make it difficult for those banks that most need capital to raise it.

Another testifying expert accused Treasury of running a "hedge fund." If it is, it's a hedge fund that no one in their right mind would invest in.

Alex Pollock of the American Enterprise Institute had a free marketer's take on how Treasury should be running TARP and how it was failing miserably at that task.

Alex Pollock, a resident fellow at the American Enterprise Institute, suggested that TARP be run like a business with quarterly reports and focusing on acquiring assets.

?However, with the $50 billion ?Home Affordable Modification Program? (HAMP), TARP is not acquiring an asset at all, but simply spending the taxpayers? money to subsidize mortgage loan modifications, including subsidies to mortgage servicing companies. There is no asset acquired,? according to Pollock?s testimony.

A lawyer friend of mine told me, "You get two lawyers in a room, you immediately have three opinions." That could also apply to economists, college professors, and resident fellows, only you'd have to use a multiple of three.