- The Washington Times - Thursday, April 16, 2009

The big-spending Treasury Department has suddenly become parsimonious with what remains of its $700 billion bailout fund, seeking to stretch the money by counting on institutions to return or forgo $57 billion of the $250 billion originally slated for bank rescues.

The sudden thriftiness is driven by a calculation that public anger over the bailouts and big bonuses for executives - expressed in “tea party” protests across the nation Wednesday - has killed any chance that Congress will approve additional funding any time soon.

At the same time, congressional action to restrict the pay and perks of executives at bailed-out institutions has created a powerful incentive for banks to return the bailout funds they received last year and to forgo any new requests they might have been considering.

As a result, the Treasury expects to dole out only about $218 billion of the $250 billion that Secretary Henry M. Paulson Jr. earmarked last year, when the capital was provided with fewer restrictions to prod troubled banks into lending.

The Treasury said it expects about $25 billion of that money to be returned by banks eager to rid themselves of the new restrictions.

Although the funding was originally provided to try to stimulate lending, neither Congress nor the banks are showing much concern that the paybacks could result in reduced lending to consumers and businesses. Politics - and the desire to avoid getting embroiled in it - has been driving both sides, analysts agree.

A dozen or so small banks have sought approval to return their funding, and Goldman Sachs has led a parade of large banks that say they want to return their money to the Treasury. Goldman on Tuesday took the extraordinary step of securing $5 billion in capital through a stock offering so it can start returning the $10 billion Mr. Paulson forced the Wall Street titan to take in a widely publicized meeting with top bank executives in October.

“Tough treatment at the hands of Congress” is prompting many banks to want to return their funding, said David Hendler, an analyst at CreditSights. “The rhetoric out of Washington, although it has cooled somewhat in recent weeks, remains on a hair-trigger” when it comes to bank compensation and business practices, he said.

Mr. Hendler expects many banks to try to repay at least part of the Treasury money, but most are not likely to be as successful as Goldman at raising money to replace the Treasury funds.

“Goldman seems antsy to return all of its funding as soon as possible” because the storied Wall Street firm feels it could “better maintain its franchise and employee base” without the heavy scrutiny and involvement of the government, he said.

Many banks simply won’t have the wherewithal to repay. Treasury probably will want stressed large banks such as Citigroup and Bank of America - which came close to failing in recent months and received extraordinary rescues totaling more than $50 billion - to keep the money, analysts say.

These banks, along with the other 19 largest U.S. banks, are undergoing Treasury “stress testing” to determine whether they need more funds to survive the recession. The Treasury next month is expected to lay out rules on whether and when those banks can repay their capital funds.

Treasury Secretary Timothy F. Geithner has hinted at efforts to stretch the bailout money but has not provided any details or explanation. He has assured legislators that he doesn’t expect the bailout fund to need more money any time soon.

But Mr. Geithner’s assertion that the Treasury has $134.5 billion of unspent funds has puzzled outside analysts, who estimate that far less uncommitted funds remain available. The Committee for a Responsible Federal Budget, for example, calculates that, based on prior Treasury commitments to bank rescues, auto loans and other bailout programs, only $32 billion of uncommitted funds remain available.

Most of the difference between the Treasury’s and private estimates is a result of Treasury’s lower projections of how much recapitalization funding it will end up providing to banks.

But the Treasury also expects to save money by adjusting the $100 billion program Mr. Paulson announced at the end of last year to revive the secondary markets for consumer and small-business loans. That program, which is co-sponsored by the Federal Reserve, got off to a slow start when it was officially launched last month, and has not required much Treasury funding so far.

The Treasury now expects to spend only $70 billion on programs to stimulate consumer and small business lending, and will use $25 billion Mr. Paulson originally slated for the program to eventually help fund a separate program for purchasing “legacy” mortgage loan assets from banks.

Mr. Geithner has been guarded about what he says about the bailout funding because the issue remains politically sensitive and could set off a firestorm in Congress. Also, the program is closely watched on Wall Street. Analysts say the markets could react with panic if investors perceive any shortfall of funding for the program.

“We reckon the federal government has nearly exhausted the full $700 billion,” said Richard Berner, chief economist at Morgan Stanley. He predicted that the Treasury will need far more funding than Congress has approved to repair the broken banking and financial system.

“Officials aren’t likely to persuade Congress to authorize adequate funding,” he said. “Given the scale that we think is needed for the loan program, this constraint may lead investors to downgrade the chances for success.”

The longer the political impasse continues to bar funding for the bank program, the greater the risk to the markets, Mr. Berner said. At some point, “investors may fear that policy has run out of ammunition, and markets would be at risk.”

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