December 9, 2009 / 6:22 AM / in 9 years

U.S. extends bailout fund, sees economic challenges

WASHINGTON (Reuters) - U.S. Treasury Secretary Timothy Geithner on Wednesday extended the government’s $700 billion financial bailout fund to October 2010, saying it was still needed for “significant challenges” in the economy.

Geithner, in letters to congressional leaders, pledged to deploy no more than $550 billion from the Troubled Asset Relief Program, allowing the remainder to reduce budget deficits.

The extension, opposed by many Republicans, will allow the Obama administration to tap the financial rescue program for further efforts to fight home foreclosures and to ease credit for small businesses in the hopes of spurring job growth.

“Too many American families, homeowners and small businesses still face severe financial pressure,” Geithner told U.S. House Speaker Nancy Pelosi and Senate Democratic leader Harry Reid. “Further, the recovery of our financial system remains incomplete. And near-term shocks to that system could undermine the economic recovery we have seen to date.”

Hoping to stave off a financial system collapse, Congress created TARP last year to buy up non-performing assets that were choking bank balance sheets.

But as the crisis worsened, the Bush administration quickly shifted focus to pump hundreds of billions of dollars directly into stakes in major banks. The fund was also used to bail out automakers and insurance giant American International Group.

Under the law, Geithner had to decide by December 31 whether to extend the program. If it expired, that would have forfeited about $330 billion that has not been disbursed.

Many Democrats, frustrated with soaring job losses and the program’s role as a bailout vehicle for Wall Street, have pushed the administration to use TARP funds to combat unemployment and aid struggling homeowners.

Republicans, however, have warned the Obama administration about turning it into a “slush fund” for pet projects, and some have proposed legislation that would close TARP at year end.

Democrats “love the idea of using TARP as a piggy bank for more and more federal handouts,” said Senator Judd Gregg of New Hampshire, the top Republican on the Senate Budget Committee.

“Using TARP authority for any purpose other than purchasing risky assets from troubled financial institutions to address an emergency in our financial system is inappropriate and illegal,” he said.

REPAYMENTS, DEFICIT REDUCTION

Geithner said the Treasury expects up to $175 billion in repayments from bailout recipients by the end of next year, with “substantial additional repayments thereafter.”

These funds, along with the $150 billion in TARP resources that will not be deployed, “should allow us to commit significant resources to pay down the federal debt over time and slow its growth rate over time,” Geithner said, implying some of the repayments may also be used for deficit reduction.

Bank of America said on Wednesday it had repaid the entire $45 billion it had received under the program, and CNBC reported that Citigroup could announce capital-raising plans as early as Thursday in an effort to repay its $45 billion.

The Obama administration projects the program will ultimately cost taxpayers about $141 billion. This includes an estimated $25 billion loss from commitments that will be made next year, the majority of which would come from new steps to stem foreclosures, Geithner said.

In addition to providing funds for foreclosure relief, Geithner said the new commitments would be limited to efforts to pump capital into small banks and other ways to boost small business lending, and increased support for a Federal Reserve program that seeks to foster consumer, small business and commercial mortgage lending.

Geithner’s decision was widely expected and had little impact on financial markets.

“It’s not a bad thing to keep stimulus going while the economy is fragile (although) I would prefer it if the way it was done was a little more structured and less ‘we found some money, let’s go spend it,’” said Barry Ritholtz, director of equity research at FusionIQ in New York.

The decision came as a TARP watchdog group, the Congressional Oversight Panel, released a report saying the program had failed to resolve key financial woes.

It said distressed assets were still weighing down bank balance sheets, credit availability had contracted sharply, and the bailouts had increased a sense that the government would ride to the rescue when a big firm got into trouble.

The panel credited the program with helping to stabilize markets, but said it was doing too little to stem foreclosures, which could reach 13 million over the next five years.

The panel’s chairman, Harvard Law School professor Elizabeth Warren, said the Obama administration would have to seek congressional approval if it wants to use any funds for jobs programs outside the financial sector.

The program “is not simply a slush fund that can be used on anything anyone wants to do, no matter how worthy,” she told CNBC television.

Editing by Neil Stempleman

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