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Thursday April 9, 2009

Bank tests may put Treasury in tough spot


WASHINGTON: With a check-up on the health of top US banks closing by the month’s end, the Obama administration may soon be in the uncomfortable position of going hat in hand to a hostile Congress for more financial rescue funds.

Treasury Secretary Timothy Geithner estimates the government still has US$135bil left in the US$700bil bailout kitty approved by Congress last fall. But US$135bil can go fast in a banking crisis.

If the regulatory “stress tests” of the 19 largest banks finds significant capital shortfalls, Geithner could soon find himself knocking on the door of a bailout-weary Congress.

Asked on April 5 if Treasury would be asking for more money, Geithner told CBS News that he “can’t make that judgment at this time. Again, our first priority now is just to move on the programmes Congress has passed and to put those in place as quickly as possible.”

President Barack Obama told Congress in February the administration would likely need more money to stabilise financial markets foundering on the mountain of souring debts.

In his proposed budget, Obama inserted a US$250bil “placeholder” that could have enabled the Treasury to pump a further US$750bil into US banks. But Congress, upset at the large sums thrown at financial firms where executives still enjoy big bonuses, deleted the provision.

House of Representatives Speaker Nancy Pelosi told the White House recently not to come back for more money, according to an official familiar with the conversation.

“Most people who study this closely think that the administration will have to go back to Congress for more money,” said Doug Elliott, a former investment banker turned scholar at the Brookings Institution, a Washington think-tank.

Elliott, who published a study on the banks and the stress tests last month, said “no one knows” how much money the banks would need, but a best guess is somewhere around US$250bil.

When the stress tests conclude, banks found to need capital would then have six months to raise it, or take funds directly from Uncle Sam.

If the administration finds banks are under-capitalised by just US$100bil, the stress test would lack credibility, Elliott contended. At the same time, a figure like US$500bil might be “too scary” and could cause a further collapse in confidence, exacerbating the banks’ woes, he said.

Banking experts say Citigroup Inc and Bank of America are likely to be among those that need extra capital, although the banks contend they are in solid shape. Both companies have already received emergency government bailouts.

Citigroup chairman Richard Parsons told Reuters on March 12 that he did not expect his company to need more government money as it “is actually one of the better-capitalised banks in the world.”

And Bank of America chief executive Kenneth Lewis said the same day his bank was profitable in January and February and should be able to ride out the recession without new help.

“Right now, I don’t think they’d get it,” Republican Senator John McCain of Arizona told Reuters when asked about the willingness of lawmakers to fork over more funds.

Senate Finance Committee chairman Max Baucus expressed confidence that Geithner would be able to make do with the money remaining in the existing bailout fund.

“I don’t think they will come back. I think they are doing their level best to avoid coming back,” the Montana Democrat told Reuters.

If the Treasury-controlled fund proves too small for the task, there may be other ways the government could support under-capitalised banks.

In late March, the Senate Banking Committee approved a proposal to increase the authority of regulators to borrow from the Treasury Department to deal with a slew of expected bank failures.

The provisions, introduced by Republican Senator Mike Crapo of Idaho, would increase the Federal Deposit Insurance Corp’s (FDIC) borrowing authority to US$100bil from US$30bil now to deal with banks and increase the National Credit Union Administration’s (NCUA) limit to US$6bil from US$100mil for non-profit credit unions.

The provisions also allow the agencies to exceed the new limits through the end of next year for up to US$500bil for the FDIC and US$18bil for the NCUA in the event of extraordinary circumstances. It is not clear, however, that is the tack the administration would take, even if Congress approves the authority in time. In the end, Geithner may need to march up to Capitol Hill to win over reluctant lawmakers.

In that case, “there would have to be transparency, there would have to be oversight, there would have to be an entirely new proposal that would guarantee that we knew how this money was being dispensed,” said McCain, the former Republican nominee for the White House. — Reuters

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