As policymakers in Washington battle noisily over health-care reform, the Obama Administration is quietly considering another significant, controversial policy matter -- whether to extend the government’s $700 billion financial bailout program into 2010.
Under the bailout legislation Congress approved last fall, the Troubled Asset Relief Program, or TARP, will expire on Dec. 31. Once it expires, the Treasury Department loses its TARP spending authority. There is more than $200 billion in "uncommitted" funds left in TARP.
But the TARP legislation also grants the Administration the right to extend the program through Oct. 3, 2010, the second anniversary TARP’s launch. To trigger the extension, Treasury Secretary Timothy Geithner must send Congress, in the next 90 days or so, a notification letter that includes "a justification of why the extension is necessary to assist American families and stabilize financial markets, as well as the expected cost to taxpayers," according to the legislation.
For financial, political and public relations reasons, it’s not a simple decision.
These days, TARP is not popular on Capitol Hill. Many lawmakers have heard from constituents angry about continuing taxpayer bailouts -- and the bonuses at some firms that got bailout money. Extending TARP could generate more backlash against the program in an election year.
Other lawmakers complain both the Bush and Obama Administrations failed to use the program for its original, principal purpose -- to purchase toxic assets from troubled firms. [The Obama Administration recently launched a toxic-asset purchase program, but it is expected to be limited in scope.] Further, one analyst also says extending TARP may send mixed signals to taxpayers and investors about the health of the financial system just as the Obama Administration says the financial crisis is ebbing.
As the one-year anniversary of the collapse of Lehman Brothers approaches -- and with the stock market higher and banks recovering -- the Administration has been claiming credit for rescuing the financial system “from the edge of the greatest financial catastrophe since the Great Depression,” as a new Treasury presentation puts it. You can read the 32-page document, titled “Back From the Brink: An Update” below.
“It is…clear that such a turnaround was not inevitable, nor was it an accident,” Geithner said in testimony Thursday. “It happened because the Obama Administration and Congress put in place a comprehensive strategy that was unprecedented in size and scope.”
But if the administration extends the TARP into 2010, people may question its statements and analysis.
“Part of it is atmospherics: 'Things are better, they're better, they're better. Whoops! We want the TARP! Not so better,’ ” said Karen Petrou, managing partner at Federal Financial Analytics, a Washington research firm. “It's very difficult to pull that mixed message off. But [extending TARP] could be [pitched] as an insurance policy, perhaps. But that's part of the politics. It's also part of the market communication.”
A financial-industry source close to the process said the Administration is likely to extend TARP, but it is struggling with when and how to send the notice. The source said the Administration would like some expression of support from Congress for the move before Geithner sends his letter.
A Treasury spokesperson said, “No decisions have been made on TARP extension yet.”
What's more, banks may still need the TARP “insurance policy.” They face not only continuing economic uncertainty, but also more write-downs and losses from billions of dollars in commercial real estate loans that have started going bad.
“It’s too early to say to what extent fresh TARP [investments] will have to made” in banks,” said analyst Bert Ely, of Ely & Co. in Alexandria, Va., who believes the Administration will extend TARP.
But Ely says the future of TARP is muddied in part because “TARP is very unpopular with the banks themselves. They don’t like all of the restrictions that come with it, which is why banks have been very aggressive in trying to pay back those TARP investments.”
If they don’t seek TARP funds, he said, “that means that the industry is going to have to be able handle its commercial real estate problems [and] other loan losses out of going-forward earnings and raising capital.”
The Financial Services Roundtable, an industry association of 100 top financial firms, supports extending TARP.
“We believe the economy is beginning to recover, but we believe that TARP should be extended to provide continued liquidity to the markets and the economy,” said Scott Talbott, the FSR’s senior vice president of government affairs.
The American Bankers Association is not as committal.
“While the banking industry did not ask for the program, the financial results for Treasury have been positive, [with] more than half of the government investment in banks already paid back and the Treasury earning a 16% rate of return,” the ABA said in a statement to FOX Business. “There may be some ‘insurance’ value in not allowing the program to expire just yet, as the outlines of recovery remain unclear.”
The association has asked Treasury to consider establishing a new TARP investment program, using $2 billion to $5 billion, to help community banks with exposure to commercial real estate loans.
“Some of the remaining resources may be useful in assisting community banks that are viable but in some difficulty right now,” the ABA said. “In conversations we have had with Treasury officials, we have noted how a relatively modest investment could help move many community banks into the category of ‘well capitalized,’ enabling them to increase their financing of economic recovery.”
Rep. Jeb Hensarling (R-Texas) is a TARP critic, a member of the House Financial Services Committee and a member of the Congressional Oversight Panel for TARP. In June, he introduced legislation to shut down TARP on Dec. 31. His bill has 32 Republican cosponsors.
Among other things, “banks are again raising capital in the private markets,” Hensarling said when he introduced the measure. “If banks are unable to raise capital, there is adequate unused TARP capital for this shortfall.”
Several Democrats who also have criticized TARP did not respond to requests for comment.
Back From The Brink: An Update
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