Fixing the Banks Should Be Job No. 1

Nothing matters more now to markets and the economy than how the Obama administration handles the challenge of assisting America's beleaguered banks. We're in a global bear market, a credit crunch and a recession due not only to fundamental problems in banks themselves, but due to the arbitrary and destructive way the U.S. Treasury, the Federal Reserve and the FDIC intervened in Fannie Mae, Freddie Mac, AIG, Lehman Brothers, Merrill Lynch, Washington Mutual and Wachovia.

We've seen what happens when government gets it wrong. Attempting to create confidence in banks, government does just the opposite by acting unpredictably, unilaterally and without accountability. The result is a global crisis.

Since those early tragic mistakes, the banking regulators have started to get it right. Injecting capital in banks using TARP funds, and the rescues of Citigroup (C) in November and Bank of America (BAC) in January were the right things to do. These were legitimate acts of assistance to these firms. How different these were from the earlier interventions, in which it almost seemed as though the object was to punish banks that got in trouble, not help them.

Don't think these latest interventions weren't just because there are still problems in the banking system. Without them, we wouldn't have a banking system right now. And besides, they might not even have been necessary if it weren't for the government's botched interventions during the summer.

The best think about the Citigroup and Bank of America interventions is that they were substantially identical to each other in terms of how they were structured. That started to set up a predictable pattern, eliminating some of the uncertainty from an economy that is, more than anything else, crippled by uncertainty.

But those interventions were made under the Bush administration, and former Treasury Secretary Henry Paulson. Now comes the Obama administration, and Treasury Secretary Timothy Geithner. Uncertainty is back.

Or is it? Remember, Geithner may be new to the Treasury job, but he's an old hand when it comes to bank interventions. As president of the New York Federal Reserve, he had a key role in all the misbegotten interventions that did so much to get us in this mess to begin with. His signature is on the term sheet that had the Fed buy $30 billion of toxic assets from Bear Stearns, to facilitate its orderly takeover by JPMorgan (JPM) almost a year ago. That was the first of the government's big mistakes, and Geithner's bloody fingerprints are all over it.

But that actually gives me confidence. And it's why I was delighted when the Senate confirmed him as Treasury secretary despite his rather embarrassing failures to pay all his taxes. For one thing, if we can't have a tax cutter as Treasury secretary, we might as well have the next best thing -- a tax evader. But that aside, the important thing is that Geithner has personal experience in bank interventions, learning the hard way exactly what not to do. And when it comes to government intervention in markets, knowing what not to do is the most important thing.

So I'm expecting that, next week, when Geithner rolls out the Obama administration's plans for propping up the banking system, it won't be in substance all that much different than what its predecessor did. And as far as I'm concerned, that's a good thing.

I don't doubt that there will be a new mortgage foreclosure mitigation element. But that's a side show. The important thing is what the government does with the banks. And I'm betting that the approach will be more capital injections and more troubled asset guarantees, both on fairly generous terms.