Bank tests could put Treasury in tough spot

WASHINGTON Tue Apr 7, 2009 1:46pm EDT

One-hundred-dollar notes are placed on a desk for counting at the Korea Exchange Bank's headquarters in Seoul April 7, 2009. REUTERS/Jo Yong-Hak

One-hundred-dollar notes are placed on a desk for counting at the Korea Exchange Bank's headquarters in Seoul April 7, 2009.

Credit: Reuters/Jo Yong-Hak

Related Topics

WASHINGTON (Reuters) - With a checkup on the health of top U.S. banks closing by months' 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 $135 billion left in the $700 billion bailout kitty approved by Congress last fall. But $135 billion 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 programs 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 stabilize financial markets foundering on the mountain of souring debts.

In his proposed budget, Obama inserted a $250 billion "placeholder" that could have enabled the Treasury to pump a further $750 billion into U.S. 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.

STARVING FOR CAPITAL

"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 will need, but a best guess is somewhere around $250 billion.

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 undercapitalized by just $100 billion, the stress test would lack credibility, Elliott contends. At the same time, a figure like $500 billion 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 firms have already received emergency government bailouts.

Citigroup Chairman Richard Parsons told Reuters on March 12 that he did not expect his firm to need more government money as it "is actually one of the better capitalized 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.

TOUGH TALK ON CAPITOL HILL

"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 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 undercapitalized 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 Corporation's borrowing authority to $100 billion from the current $30 billion to deal with banks and increase the National Credit Union Administration's limit to $6 billion from $100 million for nonprofit credit unions.

The provisions also allow the agencies to exceed the new limits through the end of next year for up to $500 billion for the FDIC and $18 billion 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," McCain, the former Republican nominee for the White House, said.

(Additional reporting by Karey Wutkowski, John Poirier and Dan Wilchins; Editing by Andrea Ricci)

FILED UNDER: