By William Patalon III
Money Morning/The Money Map Report
President-elect Barack Obama yesterday (Monday) asked Congress to release the remaining $350 billion in bank bailout money that's part of the $700 billion Troubled Asset Relief Program (TARP).
In a letter addressed to the leadership of both the U.S. Senate and the House of Representatives, top Obama economic aide Lawrence H. "Larry" Summers highlighted five key reasons the incoming president is seeking use of what remains of the U.S. Treasury Department's $700 billion TARP.
Summers, the director-designate of the National Economic Council, said President Obama has vowed to:
- Use the government's "full arsenal of tools"to jump-start lending to both consumers and businesses.
- Reform oversight of TARP and any related responses to the ongoing U.S. financial crisis.
- Utilize "smart, aggressive policies"to reduce foreclosures.
- To toughen the requirements bailout applicants would have to meet before receiving any of the taxpayer-supplied federal money.
- And to try and attract private-sector capital in order to accelerate the end of the bailout program.
The Obama team sent the letter to congressional leaders yesterday. Earlier yesterday – even before the letter was sent – President-elect Obama asked the Bush administration to notify Congress of Obama's intent to use the remaining TARP funds.
"President Bush agreed to the President-elect's request,"White House Press Secretary Dana Perino said in a statement. "We will continue our consultations with the President-elect's transition team, and with Congress, on how best to proceed in accordance with the requirements of the statute."
A Democratic source in Congress told CNN News over the weekend that the Bush administration may soon request the funds, and Money Morning reported that the president-elect might make such a move.
A Rough Ride for TARP
The Treasury Department on Thursday said that it's so far spent $267 billion buying preferred stock in financial institutions and U.S. automakers. But the agency held back on spending or even committing the remainder, reasoning that with Obama due to take office so soon, it would be better for the new president to disburse the rest of the money.
Late last week, congressional watchdog Elizabeth Warren said the Treasury Department has done nothing to make sure $700 billion in taxpayer-provided bailout money is used to buttress the weak U.S. mortgage market, which has been the key catalyst for the growing global financial crisis. Warren, who heads the Congressional Oversight Panel for the bailout program, told ABC News on Friday that there was no evidence the Treasury had used TARP bailout money to put a floor under the falling U.S. housing market by avoiding preventable foreclosures.
"There's just no money that's gone in that direction,"Warren said. "This one's not even arguable. The TARP funds themselves have not been used in this way despite congressional statutes requiring them to do so."
The congressional investigation is just the latest in a series of revelations demonstrating the possible misallocation of the taxpayer-provided bailout money. An ongoing investigation by Money Morning has detailed how banks have used the first $350 billion: They've used the capital to finance investments in other banks – including an investment in China – and to pay bonuses to executives. Then they audaciously refused to say where the money went, or how it was used, Money Morning has shown.
Ironically, the news that Obama is requesting the bailout money comes just as banks have started lobbying the federal government to go back to its original TARP proposal, under which the Treasury Department would actually buy back troubled mortgage assets. U.S. Treasury Secretary Henry M. "Hank"Paulson Jr. pulled the plug on that idea about two months ago, opting instead for the redesigned strategy under which the agency bought stock directly in the struggling banks, insurance companies and brokerage houses – as well as at least two of the U.S. "Big Three"automakers.
News that Obama was seeking the funds came just hours after President George Bush, speaking at his last regular White House press conference, said President-elect Obama hadn't made any request for the funds.
"I told him that if he felt he needed the $350 billion, I would be willing to ask for it," President Bush told reporters yesterday. However, he also "hasn't asked me to make the request," Bush told reporters.
Under the bailout legislation approved by Congress in October, the administration must formally notify Congress that it wants to access the second installment of $350 billion, CNNMoney.com reported. Unless Congress passes a resolution rejecting the request within 15 days, the Treasury Department can begin tapping the funds.
Even with the news that Bush will request the funds, the money won't be available until the Obama administration is in office. Inauguration Day is Jan. 20 – a week from tomorrow (Tuesday).
How the new administration plans to spend the second half of the TARP funding has emerged as a major issue on Capitol Hill – almost as big as congressional concerns over the size and makeup of the Obama administration's planned new stimulus package, an estimated $800 billion plan that includes tax cuts.
Lawmakers on both sides of the aisle have expressed unhappiness with the way Paulson, the treasury secretary, has deployed the first half of the $700 billion in TARP money. Congressional leaders object to how the Treasury Department made direct investments in banks with few strings attached and no process for tracking how the banks are using the money.
Leading Democrats in Congress have made clear that reducing foreclosures will be among their chief priorities for the use of the second half of TARP funds. In fact, House Financial Services Chairman Barney Frank, D-Mass., has introduced a bill that promises $50 billion of mortgage-foreclosure relief and toughens terms on companies that do receive taxpayer money.
However, after a meeting with key members of Obama's economic team Sunday, Senate Democrats expressed optimism about plans to more sharply focus the bailout of the U.S. financial-services sector. With that newfound optimism, Congressional Democrats are now trying to drum up enough votes to keep critics from passing a measure that would block lawmakers from releasing the second half of the TARP rescue money, CNN.com reported.
Although a measure opposing the release of that money has been introduced into the House, passage of the bill would require a majority vote.
A Call for a Return to 'TARP Classic'
Despite criticism of how the first half of the TARP money was deployed, President Bush earlier yesterday defended his administration's approach to the bailout. He reminded listeners that there was a real concern the U.S. economy was poised for a total financial meltdown – especially back in the Fall, when there were widespread fears that the United States was headed for a reprise of the Great Depression.
What's more, Bush said there are now signs that the U.S. financial markets are "beginning to thaw"- a sign that the TARP strategy is working. Treasury Secretary Paulson agreed, stating that the financial sector has been stabilized by the capital infusions.
Even so, the overall economy has endured a sharp decline in recent months. Companies have slashed workers at a rate not seen since the end of World War II, credit remains tight and companies and consumers alike have pulled back hard on spending.
And U.S. banks still hold hundreds of billions of illiquid mortgage-backed securities that, if downgraded, could spawn a whole new round of potentially ruinous write-downs. That's why a number of experts in the financial-service sector are lobbying for a return to the earlier TARP premise – some wags are calling it "TARP Classic"- that would remove "toxic"financial assets from bank balance sheets.
Leading the charge for a return to what some might refer to as "TARP classic" is SIFMA, the Securities Industry and Financial Markets Association trade group that's based in Washington.
"We need to get the markets moving again," Tim Ryan, chief executive officer of the Washington-based Securities Industry and Financial Markets Association trade group, told Fortune. "We have no problem with capital injections, but if you do capital injections without taking care of the bad assets, it just causes the problem to go into hibernation."
Ryan, a one-time U.S. Treasury official, is also a former director of the Resolution Trust Corp. (RTC), the government-created vehicle that cleaned up the savings-and-loan mess of the early 1990s – and did so ahead of schedule and under budget. Ryan said the lesson he learned from that role was that the only way to get banks to lend again is to get rid of the bad assets that keep them too scared to do so.
Others agree. In a whitepaper issued this week, the Organisation for Economic Co-operation and Development said that a study of financial crises over the past three decades suggests that isolating bad assets is a key to a successful response to a major market meltdown, Fortune reported.
Even the Congressional Oversight Panel headed by Warren, the congressional watchdog, criticized TARP for how it handled such initiatives as the government bailout of Citigroup Inc. (C) back in the fall.
Citi received $25 billion of TARP money in October, and the Treasury Department insisted that any bank that received federal bailout infusions were now healthy. Unfortunately, Citigroup's shares plunged, forcing the government to come to the rescue a second time only one month later. That second time around, the government has to provide an additional $20 billion in return for preferred stock, while also providing a $306 billion loan guarantee.
News and Related Story Links:
Banks Want the Old Bailout Back.
Obama asks for TARP funds
Money Morning Investigative Report on the Bank Bailouts (Part IV):
Congressional Watchdog Criticizes Treasury for Failing to Track $350 Billion in Bank Bailout Money.
Lawrence H. Summers.
Money Morning Investigative Report on the Bank Bailouts (Part V):
U.S. Banks Refuse to Detail How They're Spending Federal Bailout Money.
Resolution Trust Corp.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.