Plan B

Story Highlights:

• The government made several shifts in its various rescue programs this week.
  o The Fed and Treasury restructured AIG's original bailout deal.
  o The Bush administration announced a new program to restructure at-risk mortgage loans through Fannie and Freddie.
  o Paulson announced a change in TARP's focus.
• Changing rules in the middle of the game causes uncertainty about the present and the future.
• History shows government intentions often result in undesirable consequences, so it's worrisome these bailout plans are evolving into seemingly broader commitments.

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Someone give the US federal government an "A" for effort. Results notwithstanding, the government has tackled the financial crisis head on. First with bailouts and other bailout miscellany, and now with strategy shifts in its various rescue programs. This week alone saw the Fed and Treasury AIG's original bailout terms, the Bush administration a new program to modify at-risk mortgages through Fannie and Freddie, and Treasury Secretary Paulson officially a change in focus for the now ill-named Troubled Asset Relief Program (TARP). Unfortunately, they should savor that grade, because effort is all they're likely to get an "A" in.

Shifts in strategies usually elicit protests from the loyal opposition of some sort—especially when they involve billions of dollars like TARP. But few seem to be asking Paulson what changed in the last few weeks to cause him—suddenly—to move from pounding the table on the original TARP initiative to his current stance. Paulson's speech TARP's new focus offered few specifics on why—leaving much to the imagination about the current economy and about the value of "troubled assets." Others have TARP's efforts thus far haven't translated into a complete ease in lending, especially to consumers. Call us overbearing, but we never regarded TARP as carte blanche—it was a financial rescue program to be exercised with some alacrity and discipline. It's therefore vexing and disconcerting to see the plan's focus shift in the breeze as it has.

Whatever the reasons for the recent shifts, one thing is clear: Changing the rules mid-game creates uncertainty about the present and the future. These shifts lessen confidence in the government's ability to pinpoint and remedy problems and multiply the possibility of unintended, negative consequences. Just the persistence of the unknown by itself is harmful to stock prices.

History us government intentions often result in undesirable consequences, so it's worrisome these bailout plans are evolving into seemingly broader commitments. TARP's fund dispersions are looking more and more like a classic political redistricting fiasco, with funds being earmarked for credit card lenders, municipalities, or just about anyone who wants a piece of the pie. What's next? Will there be a Plan C where TARP suddenly starts funding troubled foreign banks? Who's to say?

If the government's bailouts and strategy shifts ultimately don't amount to real economic benefits, then all erstwhile efforts are wasted. We hope the plan gains some focus soon and isn't too diluted by political special interests in the process.