UPDATE 3-US financial rescue cheap vs past crises-Geithner

Thu Dec 16, 2010 3:04pm EST

* US' Geithner says TARP cost likely under $25 billion

* US financial rescue cheap compared to past-Geithner

* Geithner hopes Fannie, Freddie to write down principal (Adds comments, details on housing rescue efforts)

By David Lawder

WASHINGTON, Dec 16 (Reuters) - The price of corporate bailouts in 2008 and 2009 looks cheap compared to past crises, U.S. Treasury Secretary Timothy Geithner said on Thursday, while urging more drastic action from housing finance giants Fannie Mae and Freddie Mac to help homeowners.

For the first time, Geithner said Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) should take part in Obama administration programs to write down principal on loans for those who owe more than their homes are worth, often referred to as underwater mortgages. [ID:nN16238628]

Vowing that work on housing "is not done," Geithner told a congressional panel that the Treasury would likely lose money on its housing support programs, but probably faces a final net cost of less than $25 billion on the $700 billion Troubled Asset Relief Program (TARP) portion of the bailout.

Geithner told the bailout overseers that Treasury expects to earn a profit on its remaining support under TARP for banks, automakers, credit markets and American International Group (AIG.N).

He said the overall direct cost of all of the government's financial rescue efforts, including more than $150 billion to cover Fannie and Freddie losses, will be less than 1 percent of U.S. gross domestic product, Geithner said.

"The overall costs will be incredibly small in comparison to almost any experience we can look at in the United States or around the world," he told the Congressional Oversight Panel that has overseen the TARP since it was launched at the peak of the crisis by the Bush administration in 2008.

Geithner conceded the U.S. economy remains scarred by the crisis, with unemployment near 10 percent, while regulators across Washington moved to implement a range of post-crisis regulatory reforms approved in July.

Asked about a new Congressional Budget Office estimate that TARP's net cost will be as low as $25 billion, Geithner said: "I suspect that number will be too high".

TARP PRICE-TAG PLUMMETS

The estimated cost of TARP -- just one part of crisis supports that totaled trillions of dollars -- has fallen sharply.

The CBO initially expected the government to take a $350 billion hit on TARP. Treasury's most recent estimate was for about $30 billion, after all investments in AIG are sold.

The less-than 1 percent estimate for all government support compares to about 2.4 percent of GDP spent to deal with the savings and loan crisis of the 1980s and 90s, according to the Government Accountability Office.

Geithner's testimony came a day after the Treasury collected another $2.1 billion from its $49.5 billion bailout investment in General Motors Co (GM.N) and is preparing to begin selling shares in AIG next year.

The Treasury secretary appeared before the TARP oversight panel during a busy week for regulators moving to implement the Dodd-Frank law approved in July with the goal of curbing Wall Street risk-taking and protecting consumers.

The top U.S. futures regulator on Thursday moved to prevent speculators from distorting markets in oil and other physical commodities. [ID:nN16220842]

And Federal Reserve Board staff unveiled a proposal that would cap the amount banks and other debit card issuers charge retailers at 12 cents per transaction. [ID:nWEN4611]

On Tuesday, the Federal Deposit Insurance Corp proposed requiring that bank holding companies maintain minimum capital levels as strong as their deposit-taking units. [ID:nN14255372]

And the Securities and Exchange Commission on Wednesday proposed requiring companies to declare the source of certain metals and ores, another Dodd-Frank measure, an effort to reduce the flow of money to armed rebels in the Democratic Republic of Congo. [ID:nN15228409]

Regulators must craft more than 200 rules before July 2011, including a new regulatory regime for the over-the-counter derivatives market. [ID:nN14289632]

PRINCIPAL REDUCTION

Regarding housing rescue efforts, Geithner said he was hopeful that Fannie and Freddie would participate in a Federal Housing Administration refinancing program that reduces mortgage principal.

The program has had little effect, largely because Fannie and Freddie, which now dominate the mortgage market, have not shown willingness to slash mortgage principal, which would likely increase the need for government capital injections.

"We think there is a pretty good economic case for Fannie Mae and Freddie Mac to participate in those programs, and we are in the process of talking to the FHA about those, about the merits of those programs, about their concerns," he said. (Reporting by David Lawder; Editing by Kevin Drawbaugh and Tim Dobbyn)

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