Restore TARP to Its First Purpose

· A visible way for the public and lawmakers to see a resolution that is considered fair to all. The market would then be able to assess the dimensions of the mortgage crisis. The problem may well be less significant than most people assume. But whatever the number, clarity will create confidence.

Critics of TARP's purchase of toxic mortgage assets say it is impossible to know whether the government is getting a fair price. To address that, the government can accept a price the banks deem fair but insist on a "true up" revision three years later. If the government fails to earn a significant return, it would get equivalent debt of that bank to make up the shortfall. With a "true up" system, banks would be reluctant to seek a windfall on sales to TARP.

Others argue that there are simply too many loans to track and renegotiate through these obscure investment vehicles. But we advocate Marshall Plans for every conceivable urgent public need. Why not devote a similar level of commitment to the creation of a database including a detailed accounting of every troubled mortgage in America? That way, TARP -- working with local banks -- could focus first on restructuring loans with the highest likelihood of foreclosure.

Finally, it is also said that it will take too long for TARP to do its work and that TARP does not have enough capital to buy all troubled mortgages. But TARP does not have to restructure every loan in America to be effective. Once the mechanism is clear for a fraction of the loans, the likely outcomes for the whole TARP asset base will be visible to all. In the meantime, taxpayers may even get lucky and see home prices stabilize and growing numbers of aggressive bidders for TARP assets start going directly to banks still holding toxic mortgages.

A financial crisis with many dimensions cannot be solved by putting Band-Aids on each tear in the system. The correct approach is to take the biggest wound and stitch it up. Once people see that the contours of the mortgage problem are known and are being dealt with, consumer confidence will return, leading, in turn, to profound improvements in the stock and corporate credit markets.

In the early 1990s, the Japanese government encouraged banks to keep nonperforming loans on their balance sheets and value these loans as if they were not impaired. The loss of transparency (as well as the failure to put these loans into the hands of those who would restructure them) contributed to over a decade of slow growth and an underperforming stock market.

The Obama administration should not make the same mistake. If its economic team uses TARP to enhance price and value discovery of mortgages held in the banking system, we will be a lot closer to the end of the financial crisis.

Peter Ackerman is managing director of Rockport Capital Inc. John Vogelstein is senior adviser at Warburg Pincus LLC, New York.