New bank bailout studied; lawmakers balk
Jim KuhnhennThe Obama administration faces a highly skeptical Congress and an angry public if the foundering condition of the nation's banks requires yet another massive infusion of taxpayer money.
The new president's economic team, lawmakers say, must first prove that $350 billion already at its disposal can help unlock credit and slow the rate of foreclosures — and do it with more transparency and oversight.
"My advice to the administration is we've just given you 350 (billion); handle this well, focus on this," Senate Banking Committee Chairman Christopher Dodd, D-Conn., said Monday. "The last thing I need right now is to have a request for additional funds before you convince me you can manage this well, which I'm confident they can."
Asked Monday if a second bailout package is likely, White House spokesman Robert Gibbs said, "There's a series of proposals to be put in front of the president in order to address the financial stability of our economy."
Among the administration's options is a new government-backed bank to remove bad loans and other toxic assets from banks' balance sheets. That would presumably free banks to make more loans.
But banking industry estimates place the total amount of bad assets held by the financial institutions at between $750 billion and $1.25 trillion. That figure is a snapshot in time and could improve or worsen, but it illustrates the administration's dilemma. Congress reluctantly gave Obama access to the remaining unspent funds in the $700 billion Troubled Asset Relief Program, known as TARP, and many lawmakers aren't in the mood to consider giving more quite yet.
"It's way premature," Sen. Jon Kyl, R-Ariz., said Monday. "We just got through adopting the last tranche at 350."
Senate Republican leader Mitch McConnell, R-Ky., said last week that if the troubled asset program is inadequate to help the financial sector, Congress might consider providing the help through an $825 billion economic recovery plan that is now moving through Congress.
"We need to go straight at the housing problem," McConnell said Friday at the National Press Club, "and if the second tranche of TARP is not enough, that is another potential candidate for the stimulus."
On Sunday, Vice President Joseph Biden said he expected Timothy Geithner — who was confirmed Monday evening as Treasury secretary — to devise a plan to loosen credit with the existing money.
"He will then report back to the president and to me as to whether or not he thinks that 350 is enough," Biden said on CBS.
And Geithner, in a written response to senators' questions last week, said: "If we determine that further resources may become necessary, we will be clear with the Congress as to why these resources are necessary, how we intend to deploy them, and what objective we hope to achieve."
In addition to considering buying bad bank assets with the $350 billion, the administration has pledged to spend between $50 billion and $100 billion to reduce the number of mortgage foreclosures.
Mark Zandi, chief economist at Moody's Economy.com., said the $350 billion would not be enough to finance both foreclosure mitigation and a financial stability plan. He predicted the Obama administration could seek another $700 billion.
Persuading Congress that additional money is needed "may be easier than we're anticipating if we continue to lose 500,000 jobs per month and see major institutions on the brink of failure," Zandi said.
First, several lawmakers cautioned, the administration must prove it has used its current tools well. Republicans and Democrats in Congress complained loudly that the Bush administration applied a confusing strategy to the first $350 billion. After first trying to acquire bad assets, it decided to infuse banks with capital. Republicans also objected to the Bush administration's grudging decision to use a small portion of the bailout fund to help Detroit automakers.
"Trust in the TARP is at a very low ebb," said Alan Blinder, an economic adviser to President Bill Clinton and former Vice Chairman of the Board of Governors of the Federal Reserve System.
Politically, any effort to seek more money "will be an uphill battle because of how badly the first $350 billion was used," said Blinder, a Princeton University economist.
While the Senate voted 52-42 earlier this month to make the remaining $350 billion available to Obama's new administration, the House, in a symbolic vote, declined to follow the Senate's lead last week. The 270-155 vote was moot because the Senate vote was sufficient to release the money.
But House Financial Services Chairman Barney Frank, D-Mass., issued a broad caution to the banking industry and the Obama administration: "They should understand that this Congress representing the people is under enormous pressure to deny them some of the things they think are necessary."
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AP writer David Espo contributed to this story.