President Barack Obama penciled into his budget on Thursday the possibility that he may request an additional $250 billion to help fix the troubled U.S. financial system.
The figure, described as a "placeholder" and not a specific funding request, would support asset purchases of $750 billion via government financial stabilization programs, administration officials said.
Any additional request to Congress would come on top of the $700 billion financial bailout program enacted last year to deal with the overhang of toxic mortgage debt that is hindering banks' ability to lend and worsening the recession.
"Additional action is likely to be necessary to stabilize the financial system and thereby facilitate economic growth," the White House said in budget documents released on Thursday.
The administration said it was "not yet possible to provide a precise estimate of how much federal action may be involved" and was not yet requesting the money from Congress.
The Bush administration used similar placeholder figures for estimated Iraq and Afghanistan war costs in recent budgets, updating them with specific requests later.
Bank Stocks Jump
News that additional taxpayer funds for the financial sector lifted stocks, especially bank shares that have been beaten down by fears that the government may nationalize some large institutions as losses consume their capital. Shares of Citigroup were up about 6 percent, while Bank of America was up around 13 percent by mid-morning.
"The administration delivered just what the market wanted, which was government help, but not overt nationalization. That seems to be the magic wand for the stock market at the moment," said Cary Leahey, an economist at Decision Economics in New York.
An additional funding request would supplement a financial bailout fund that some analysts had viewed as spread thin among a growing number of support programs.
U.S. Treasury Secretary Timothy Geithner earlier this month proposed a new public-private investment fund to buy up $500 billion to $1 trillion of toxic assets from banks in an outline of broad financial stabilization plan.
And on Wednesday, the Treasury pledged to provide the 20 largest U.S. banks with sufficient capital—with no explicit limit—if a "stress test" finds they need more funding to withstand a worse-than-expected recession. Banks will have six months to find private capital or turn to the government.
Geithner has declined to say whether more funds would be needed, saying this could only be determined after more study and development of his programs.
Obama said in a major speech to Congress Tuesday night that cleaning up the bad debt will cost the federal government "probably more than we've already set aside."
Loans For Assets
Under the emerging public-private asset plan, the government would provide long-term loans to private investors willing to buy illiquid mortgage assets, establishing benchmark prices for them.
The White House said an additional $250 billion in funding could finance about $750 billion in asset purchases—right in the middle of Geithner's range for the asset fund and implying at a conservative 3-to-1 leverage ratio. At the height of the housing boom, banks were buying assets with borrowed funds at leverage ratios of 30 and 40 to 1.
The administration also said that based on previous rescue investments, it estimates the government will get back two-thirds of what it spends on assets—implying a net cost of 33 cents on the dollar. The $250 billion figure would also represent net costs for $750 billion in asset purchases.
The bailout has proven to be highly unpopular with many Americans who see it as rescuing Wall Street bankers and others who made risky bets on the mortgage market, while homeowners are left struggling to pay loans they cannot afford.
Federal Reserve Chairman Ben Bernanke also said on Wednesday that more funds may be needed as the government seeks to provide long-term lending to private investors who are willing to buy illiquid mortgage debt.
"I just ask Congress to provide support, provide oversight and as these programs go forward if they need additional support to consider that. But we don't know yet whether they will or not," Bernanke said.
The administration is expected to detail more about its bailout funding needs by the end of April, when the bank stress tests are due for completion, and as the Treasury finalizes more details about its stabilization plan in coming weeks.
© 2009 Reuters. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters.
|
