Financial Regulatory Forum

ANALYSIS-U.S. TARP bailout fund may outlive expiry date

By Reuters Staff
October 22, 2009

US Treasury Secretary Timothy Geithner (R) engages with reporters during the 2009 Reuters Washington Summit in Washington, October 20, 2009.  REUTERS/Jonathan Ernst    (UNITED STATES POLITICS BUSINESS) By Glenn Somerville
WASHINGTON, Oct 21 (Reuters) – The Obama administration appears to want to keep an inherited $700 billion financial rescue fund going past its scheduled expiry at year-end, but is retooling the program to focus on more than just banks.

That would be a major shift from its original purpose as a vehicle for propping up big banks — now seen as neither needing nor deserving a taxpayer-supported helping hand — and may set up a battle with Congress over the program’s fate.

The Troubled Asset Relief Program, or TARP, was approved by a reluctant Congress, on a second attempt, amid the chaos of a raging crisis in the fall of 2008 when it was feared a big bank collapse might pull down the whole financial system.

It will expire at the end of this year unless Treasury Secretary Timothy Geithner submits a written certification to Congress providing a justification for extension.
Geithner for now is playing coy.

He told the Reuters Washington Summit on Tuesday that the administration would “make that formal judgment when we need to.” However, he also said it was important to retain a capacity to help areas of the economy that are still starved for credit.

President Barack Obama on Wednesday announced a program to help one of those areas: small businesses. He proposed using some TARP funds to provide low-cost capital to the community banks that are often lenders to these job-creating engines.

“The major banks that were in critical condition a year ago need no new assistance from the government,” Obama said. “But to spur lending to small businesses, it’s essential that we make more credit available to the smaller banks and community financial institutions that these businesses depend on.”

Winding down the core elements that had “defined” the financial bailout fund — as Geithner put it — might seem to be music to the ears of Republican lawmakers who see the program as part-and-parcel of an excessive government intrusion into the private sector.

But it’s far from clear that will be the case.
Sen. Charles Grassley of Iowa, the top Republican on the Senate Finance Committee, claimed this week that the administration was using the program as “a slush fund for the Treasury to pick winners and losers in the private sector.”

A group of 39 senators wrote to Geithner in September saying TARP had been misused to take ownership stakes in banks, financial institutions and automakers. “This direct investment certainly was not the intention of Congress in passing this legislation,” they said, urging Geithner to let it expire.

But Geithner told Reuters the U.S. recovery was still in its early stages, and sounded determined to keep every tool at his disposal to meet what he called “the overwhelming imperative” of ensuring the economy regains its health.

“We need to make sure that in sort of an abundance of caution that we have the capacity, as insurance, to help this process of repair to continue,” he said, adding that targeted help was needed for areas like housing and small business.

Other administration officials similarly sounded as if they have plans for a redirected TARP in the longer term, at least for a longer horizon than the barely two months left in the program’s currently scheduled lifetime.

“TARP is now moving into a different phase and it’s very important that we now focus on access to capital for small- and medium-sized businesses,” Commerce Secretary Gary Locke said on Wednesday at the Reuters Washington Summit.

Many want to expand but can’t get the credit they need to do so, which hurts job prospects, he said.

Community banks, which lend heavily to developers and builders in their home areas, face growing strains from losses on commercial real estate loans, adding urgency to efforts to keep them stable.

That is likely a line administration officials will turn to increasingly as the TARP deadline draws nearer, making the case that anger at big banks should not cloud the need to be ready to help small ones if needed.

“This is what the American public wants and that’s what small business owners want,” Locke said.

“I mean, let’s not just bail out the banks but let’s make sure that when we help the banks that it benefits taxpayers and small business owners who are providing those funds.”

(Additional reporting by David Lawder, Editing by Chizu Nomiyama) ((glenn.somerville@thomsonreuters.com; +1-202-898-8377; Reuters Messaging: glenn.somerville.reuters.com@reuters.net))

Wednesday, 21 October 2009 17:32:19RTRS [nN21498234] {C}ENDS

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