U.S. banks may need hundreds of billions more: CBO

By Susan Cornwell

WASHINGTON (Reuters) - Weakening U.S. banks will probably need hundreds of billions of dollars in additional funds beyond what has already been approved for the Troubled Asset Relief Program, the head of the non-partisan Congressional Budget Office said on Wednesday.

"I think the gap that remains in terms of the recapitalization needed by the banking system exceeds the amount of money left in TARP, I think by a good margin," Doug Elmendorf told the Senate Budget Committee.

While some of this capital could and should come from the private sector, "the odds are that more money will be needed than has been authorized so far in the TARP, probably to the tune of hundreds of billions of dollars," Elmendorf said.

Some $700 billion has already been allocated for TARP. Elmendorf noted that lawmakers would have to decide whether to approve more money, but "I think that will be presented to you" by the Obama administration.

President Barack Obama's top economic advisers are debating how best to aid Wall Street and the banking sector that has been battered by a downturn in the housing market and a broader credit crisis.

Treasury Secretary Timothy Geithner said last week that the Obama team will soon outline a financial market rescue plan, but he could face a skeptical audience in Congress.

Lawmakers from both parties have complained about the handling of the bank rescue program under the Bush administration, and two days after Obama was inaugurated, the House voted against releasing the second half of the TARP money, or $350 billion.

That money was released nonetheless because the Senate voted not to block the funds.

House of Representatives Speaker Nancy Pelosi, asked to comment Wednesday on Elmendorf's statement that banks may need hundreds of billions of dollars more, said: "We'll see when they ask for it, what it's for."

"But we have to see how this TARP is spent," the California Democrat told Reuters, referring to the cash already in the program.

Massachusetts Democratic Sen. John Kerry said more help for the banks from the government should be conditioned upon reforms. "You may even have to have some agreement as to change of management and other things," he told Reuters in an interview.

"You need to have an agreement from those banks that they're going to change their approach, they're going to write down their toxic assets, they're going to live by a new regulatory set of standards," Kerry said.

During questioning by Senator Bill Nelson, a Florida Democrat, Elmendorf said most observers agreed with Nelson's assessment that Geithner will need to either extend guarantees that protect banks against losses; inject more capital into banks; or buy up the banks' toxic assets in a "bad bank" scheme.

The last option would be fraught with challenges as policy-makers try to pay the right price for the troubled assets, he noted.

But he also said there was downside to all the options.

"There's a tough trade-off," Elmendorf said. "We can wait for the banks to fail, and then in a sense we get (the assets) automatically."

"We don't want to benefit the managers who made bad decisions," Elmendorf added. "On the other hand, if we let them stew in their own mess, we run the risk of driving the economy further into the ground."

U.S. policy-makers should move quickly, he said.

"As the financial system is rebuilt, private creditors will have to take some losses; and some banks may have to fail: It is neither necessary nor desirable for government to take on all the losses from bad assets," he said.

The CBO offers non-partisan analysis on the costs of U.S. government spending programs.

(Additional reporting by Patrick Rucker and Kevin Drawbaugh; editing by Gary Crosse)