Enjoy Obamamania, the honeymoon may be brief

The credit markets are still on shaky ground; the stock market gives us no confidence at all. But there is one market in which prices are high and business is brisk. It's the Obama market.

On eBay and other auction sites, entrepreneurial souls are cashing in on the new U.S. president. Here, somebody has bid $4,000 (U.S.) for a pair of tickets to the inauguration ceremony; there, someone else is selling a package of special-issue subway tickets bearing Barack Obama's picture for $1,000. Social climbers who wish to attend the Obama home states inaugural ball can grab tickets on the online secondary market for $7,500 each, 50 times their face value. Even history has a price, and Tuesday promises to be a historic, inspiring day.

Wednesday? That's another story. Many parallels are being drawn between the situation president-elect Obama will inherit and the one that faced Franklin D. Roosevelt in 1933. Mostly, the comparisons are overblown - this is no Great Depression - but the scariest and most accurate one is how fragile the banking system is.

One of FDR's first acts was to declare a nationwide bank holiday, to stop a slide in confidence that had caused depositors to flee one bank after another. One of Mr. Obama's might be to inject billions more into Citigroup and God-only-knows which other banks just to keep them breathing. Of the many foul legacies of the Bush administration, the decrepit state of America's financial institutions is one that will linger long after he has gone back to armadillo-watching in Texas.

"It's really important that we get the basic problems [in the economy]fixed," said Roy Smith, a finance professor at New York University's Stern School of Business. "But the first problem has to be that we stabilize the banks so that we don't have to constantly find the financial markets coming undone because there's no confidence in the banks."

But how to repair the damage done in the Bush and Clinton years? On the left, some cry for more government intervention. But what's really needed is better intervention. There's already a ton of regulation and oversight of U.S. banks. It's just that much of it is stupid.

Take the U.S. Securities and Exchange Commission (to the woodshed, please). All those Canadians who think a national securities regulator is the holy grail, please cast your eyes stateside. The SEC, America's national securities regulator, is a big culprit in the bank crisis.

To understand why, go back to the late 1990s. Then-chairman Arthur Levitt, who became the longest-serving chairman of the SEC, went on a campaign against "earnings management," the practice of using accounting rules to manipulate profit figures, either to raise them or to smooth them over time. Good idea - until the commission decided to whack SunTrust Banks, a large commercial bank out of Atlanta. SunTrust's sin was that it had been too conservative, setting aside too much in reserves to cover future loan losses (which understated its profits). The SEC forced it to restate three years worth of financials.

Other banks got the message, and changed their practices - with the inevitable result that when the recession hit, the U.S. banking system had too little set aside in reserves to absorb the losses in mortgages, credit cards and now corporate loans. But there were many other blunders: the SEC's decision in 2004 to change capital rules for large investment banks; the 2007 abolition of the "uptick rule" that had made it harder for short sellers to pound bank stocks into oblivion; a thousand missteps and wrong turns in the oversight of Freddie Mac and Fannie Mae.

Then there's TARP, the Trouble Asset Relief Program. First it was conceived as a way to heal the banks by taking troubled mortgages off their hands, just as Resolution Trust handled the assets of insolvent savings-and-loans in the early 1990s. Then it was changed to buy direct ownership stakes in them. Badly run banks that should have failed by now were given the money on the same terms as well-managed ones. "It doesn't work," Mr. Smith said. Then TARP became a source of emergency loans for General Motors and Chrysler. But $350-billion later, the banks, and the economy, look weaker than ever.

It's up to Mr. Obama's economic team to bring some sanity to this. The first step, Mr. Smith says, should be to go back to Plan A and use the remaining $350-billion to halt the meltdown in debt securities and you can begin to heal the banks.

But some tough choices are going to have to be made. Uncle Sam can't save everyone and shouldn't try; all that does is make it impossible for lenders and depositors to distinguish between the weak institutions and the strong ones. That means many more bank failures, more disruption in the markets, and shaken confidence. In the longer term, banks are going to have to be run more conservatively; the rules on loss reserves will have to be loosened to allow them to better prepare for economic downturns. But that will constrain lending, and thus economic growth. Ugh.

The new president should enjoy his inauguration day. It might be the high point of his first year in office.