That Unpopular Bank Bailout? Geithner Wants to Extend It

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McClatchy Newspapers

That Unpopular Bank Bailout? Geithner Wants to Extend It

by
Kevin G. Hall

With protestors in the background, Treasury Secretary Timothy Geithner testifies on Capitol Hill in Washington, in this Sept. 10,2009 file photo, before the Congressional Oversight Panel hearing the financial markets. (AP Photo/Susan Walsh, File)

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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