TARP Dead, Treasury Now World's Biggest Private Equity Firm

The Treasury is considering more changes to the Trash Asset Removal Plan:

It will no longer will buy Trash Assets (and it never has)
It will continue to inject capital directly into companies but only alongside other private-market investors

These potential changes are actually positive, but they still don't address the elephant in the room: writedowns.

Historically, the most successful financial system bailouts have done two things:

Recapitalized banks (by injecting capital)
Forced banks to write down asset values to nuclear winter levels, thus staving off the need for future writedowns (and, in so doing, encourage private investment).

It is hard to believe that, say, Citigroup has written down its $546 billion of on-balance sheet consumer assets to nuclear-winter levels, let alone the off-balance sheet ones. Thus, any new investor will likely get its equity wiped out by future writedowns and additional capital. This is a major deterrent to investing in Citigroup.

The new TARP modifications will deal with this to some extent by forcing financial institutions to raise private capital alongside the government money. Private investors, presumably, will be more concerned about preserving their capital than the government will be and therefore won't invest unless the banks have written their assets down appropriately.

Forcing banks to raise private capital will also get the government out of the business of picking winners, which has created the potential for unfairness, corruption, and a whole host of perceived improprieties, as well stoked the fires of senators like Chuck Schumer who complain that the taxpayer money is only going to healthy companies, not the ones who need it most.

Bottom line: These changes would be improvements to TARP, but the government should still force participating banks to write down their assets to nuclear winter levels--at which point there won't be anything else to do with the money other than buy other banks and lend. (And give executives bonuses, of course).