Thirty-four US banks or Savings and Loans have failed in the past 13 months with three going to the wall in the last weekend alone.

One of these failures was the biggest one so far in US history: Washington Mutual. The collapse of this giant, and the bailouts of Wachovia, Citigroup, Bank of America and a host of other leading names in banking saw the creation of the now discredited TARP (Troubled Asset Relief Program), which did nothing to stem the carnage.

Now the new US Administration has revealed a revamped version of TARP, and markets and analysts are underwhelmed. US sharemarkets fell more than 4% overnight, undermining the build up in confidence from last week.

The three-part program to stabilise the financial system is a move that, at first glance, failed to meet the credibility test. Despite the market’s fall (which had other factors as well), it’s not a total thumbs down. The $US800 billion economic stimulus package will now be hopefully passed by Congress this weekend.

But many in the markets had high hopes: this comment from The Financial Times‘ Lex column wrote is one of the more thoughtful:

This was a golden opportunity for the Obama Administration to wow investors, policymakers and the public with its forceful, new approach. It failed…the public craved clear action but were offered sound bites over substance. The “stress test”, which will be mandatory for banks with over $100bn in assets (a select group of about 14), is confused. The Treasury remains unprepared to face the uncomfortable reality that some of banking’s big beasts and best brands are insolvent.

An unrealistic level of bullishness characterised last week ahead of this plan being announced. There had been hopes that the US Government would reveal a plan that put regulators ahead of the crisis, instead of chasing it, as has been the case for the past 18 months. It is hoped that once the plan is settled, with more detail and some operating guidelines, progress will begin to be made.

Congress, especially the Democrats from president Obama’s own party, should share some of the blame for any frustration: they have been more intent on points scoring and grandstanding than on getting a sound, coherent package approved. After the failure to quickly approve the stimulus package and the failure of the Bush bailout idea, you can understand why Obama doesn’t want to go near Congress on the new bank bailout package.

But nothing was really done about so-called ‘zombie banks’ which are institutions that look alive, have huge holdings of assets and liabilities, but which essentially can’t lend and are being supported by the Government. The likes of Citigroup and others on Wall Street. The Treasury will ‘stress test’ them to see if they are healthy, and give them more money if they are not.

It seems to be light on in terms of commitment to do something draconian and different: such as admitting that the country’s major banks are in effect insolvent and need to have radical surgery, to the point of euthanasia applied to them.

It’s not that the plan is completely light on substance: there seems to be a great acceptance of the need to directly buy dodgy assets and inject money into the credit creation system. These twin aims will be done by way of public-private investment funds with names such as the Legacy Asset Partnership Bank and the Consumer and Business Lending Initiative. The first will buy toxic assets; the second will promote consumer and small-business lending.

“There’s a lot of private capital out there that wants to come in. It just can’t get the financing,” Treasury Secretary Tim Geithner insisted. claiming in his speech these new programs will encourage private investors, and then once the markets are unfrozen, would withdraw from the market “as quickly as possible.”

The main components of the Treasury’s package are a joint public-private-sector funds to buy as much as $US1 trillion of illiquid assets and a $US1 trillion program to supply new credit to consumers and businesses. The plan also calls for additional taxpayer funds to be injected funds into banks, while imposing tighter restrictions that will include limits on dividend payments, acquisitions and executive pay.

An initial fund of $US500 billion to absorb toxic assets will be established and $US50 billion will be committed to prevent home mortgage foreclosures, which is still the driving force of the current instability.

The Treasury and Federal Reserve will also expand the existing program to boost lending for mortgages and other consumer and business loans to up to $US1 trillion.

The Treasury “stress test” of the big banks (the requirement is to have $US100 billion in assets) will emerge as the crucial test of the new package. It will see how well they are placed to handle a further slowing of the economy, and provide additional funds as needed. What happens if they fail, what happens is they fail badly? A sign of another capital injection from the Government will be tantamount to saying that it failed the ‘test’.

All of Australia’s big four banks would be included in the list of 14 US banks with $US100 billion or more in assets. All would pass the stress test.

That’s a point the Commonwealth Bank emphasised this morning with its sold interim profit of $2.013 billion on a cash basis, down 16%, as forecast last week. But the bank warned the dividend might not be able to be maintained at present levels. At least a dividend is being paid ($1.13 for the December period).

For banks in the US and the UK, dividends are a luxury at the moment. In Australia, they are something to cut to conserve cash. It’s still the difference between us and them and the best way of explaining the still-solid nature of our financial system, despite the knocks that lie ahead.