US Treasury: low confidence blunts TARP loan impact

By David Lawder

WASHINGTON, Dec 31 (Reuters) - The U.S. Treasury said on Wednesday its $700 billion bailout program has stemmed a series of financial institution failures, but low economic confidence was blunting the delivery of new loans spurred by bank capital injections.

In written responses to a congressional oversight panel, the Treasury said as along as economic confidence remained low, banks would remain cautious about extending credit and consumers and businesses would view new debt cautiously.

"As confidence returns, Treasury expects to see more credit extended," the Treasury said in response to the Congressional Oversight Panel for Economic Stabilization.

"The increased lending that is vital to our economy will not materialize as fast as anyone would like, but it will happen much faster as a result of deploying resources from the TARP to stabilize the system and increase capital in our banks," the Treasury added.

The Treasury has earmarked more than the initial $350 billion of the so-called Troubled Asset Relief Program with this week's purchase of a $5 billion equity stake in auto and mortgage finance company GMAC LLC.

But it has only disbursed $207.5 billion in total funds so far, with more than $100 billion of bank capital still to be distributed.

The Treasury said the capital injections into healthy banks have helped these institutions maintain strong balance sheets amid deteriorating credit quality, easing the pressure on them to scale back lending.

The questions were sent to Treasury in a Dec. 10 report from the congressional oversight panel, chaired by Harvard Law School Professor Elizabeth Warren, which criticized the Treasury for its lack of clarity.

A spokeswoman for the panel could not be reached for comment on the Treasury's responses.

One question asked, "Is the public receiving a fair deal?"

The Treasury answered, "Yes. The American people have benefited from the financial rescue package."

It went on to say that the Treasury's investments were designed to provide a positive return. These include $250 billion of senior preferred shares in financial institutions that will earn a 5 percent dividend which rises to 9 percent after five years and warrants that will enable taxpayers to benefit from any rise in the market value of the institutions.

"Over time, the Treasury believes the taxpayers will be protected by ensuring the stability of the financial system and by earning a return on these investments when they are eventually liquidated," the Treasury said. (Additional reporting by Mark Felsenthal, Editing by Chizu Nomiyama)