That unpopular bank bailout? Geithner wants to extend it

McClatchy NewspapersDecember 9, 2009 

WASHINGTON — A day ahead of testimony in which he's sure to be grilled about the controversial taxpayer-funded bank bailout program, Treasury Secretary Timothy Geithner announced Wednesday that he wants to extend it into late 2010.

"History suggests that exiting prematurely from policies designed to contain a financial crisis can significantly prolong an economic downturn," Geithner wrote in a letter Wednesday to House Speaker Nancy Pelosi, D-Calif.

The Troubled Asset Relief Program, widely known as TARP, will continue until October 3, 2010, Geithner said, arguing for prudence in keeping an unpopular program afloat until almost the end of next year.

"We must not waver in our resolve to ensure the stability of the financial system and to support the nascent recovery that the administration and Congress have worked so hard to achieve," he said.

The letter included an exit strategy for getting out of the $700 billion TARP, which passed during the Bush administration and is widely credited by economists for stabilizing a global banking system on the verge of collapse.

Instead of exiting the TARP, Geithner said its unused balance could still be used to support foreclosure prevention, to bolster the ability of community banks to lend to small businesses and to help efforts to restore activity in secondary bond markets where loans are pooled together and packaged for sale to investors.

If economists think the TARP was successful in easing the financial crisis, Americans found the idea of using taxpayer money to rescue Wall Street downright offensive. It's why Democrats and Republicans alike want the TARP to end. Banks, too, want the program to end, with Bank of America and J.P. Morgan Chase repaying their TARP funds and Wells Fargo and Citigroup desperately trying to do the same to avoid the stigma of government support.

Geithner is expected to get an earful when he testifies Thursday, for the third time this year, in front of the Congressional Oversight Panel, created when Congress passed the TARP to be a watchdog for the rescue effort. That panel on Wednesday issued a 181-page report on what the TARP has and hasn't achieved.

"The evolving nature of the TARP, as well as Treasury's failure to articulate clear goals or to provide specific measures of success for the program, make it hard to reach an overall evaluation," the report said.

In a teleconference with reporters, panel chairwoman Elizabeth Warren said the TARP was effective in stopping a spreading panic in financial markets. However, she said, the TARP also was supposed to support the broader economic recovery by stemming foreclosures and boosting lending to consumers, and in those aspects it's fallen far short.

"Step one was to stabilize the economy, and that has been accomplished and we give the Treasury very high marks for that," Warren said. "But there was a very important step two behind that. The TARP program was not authorized for the sole purpose of bailing out large financial institutions. Congress specifically states in the legislation that it expects that the benefits will be felt in getting ahead of the foreclosure crisis and in dealing with the larger economy."

Of the $700 billion authorized for TARP in late 2008, the Treasury Department now expects to deploy just $550 billion. It also expects up to $175 billion in TARP repayments by the end of next year, and this week Treasury announced it expects the TARP will cost taxpayers $200 billion less than anticipated.

Pelosi, with the support of President Barack Obama, is now looking to divert some of those TARP "savings" into job creation efforts with the nation's unemployment rate at 10 percent and projected to rise into next year. Obama has conditioned his support on using some of those TARP "savings" into deficit reduction, while congressional Republicans would like to see if all of it used to knock down the deficits.

The CBO estimates the deficit will reach $1.4 trillion this year, roughly the same as last year, and add to a total national debt that now tops $12 trillion. The CBO also sees huge deficits ahead.

Critics of TARP point to elements of the bailout plan that aren't designed for the banking system, namely the $50 billion slated to help slow a rising tide of foreclosures. The oversight panel's report Wednesday offered scathing criticism of Obama's Making Home Affordable effort.

The TARP funds designated for foreclosure mitigation efforts were supposed to be used to repay mortgage servicers, who collect mortgage payments on behalf of investors who own pools of U.S. mortgages. In exchange for modifying a mortgage, services were to be paid as an incentive for them to do right by borrowers.

Some 79 servicers, representing 85 percent of the mortgages not held by government housing entities such as Fannie Mae and Freddie Mac, have entered into contracts with the Treasury Department. Through the end of October, however, only 10 of these servicers have actually made permanent loan modifications and been reimbursed.

That's a dismal number considering that Treasury expected 50 percent to 75 percent of trial mortgage modifications to move to a permanent solution. Through October's end, there'd been only 10,187 permanent modifications. That's a conversion rate of 4.69 percent of the trial modifications under way.

"This program is not working to stem the foreclosure crisis," Warren told McClatchy. "Treasury's best estimate is that this program will deal with 3-4 million foreclosures. But current predictions put at us 8-to-13-million foreclosures, so even if every assumption Treasury made was true, if every best-case scenario occurred, we'd be dealing with about a third of projected foreclosures."

ON THE WEB

Warren's report

Treasury letter

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McClatchy Newspapers 2009

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