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US banks may get $750bn fresh aid

Washington, February 27, 2009

US president Barack Obama could funnel up to $750 billion in fresh government aid to battered US banks, more than doubling a financial bailout approved last year, his proposed budget has revealed.

The White House penciled in a $250 billion 'placeholder' amount for additional financial rescue efforts into the fiscal 2010 budget, but said this would represent the net cost of asset purchases from financial institutions.

It estimated a loss of 33 cents of every investment dollar, so if it invests $750 billion in bank shares or other assets, the ultimate cost to taxpayers would be only one-third of that amount.

But administration officials were quick to say that they may not ask for any new funds.

'We have no plans to go to Congress to ask for additional money, and again the hope is it will not be necessary,' White House budget director Peter Orszag told a news briefing.

'But just in case it is, the budget includes a placeholder should further stabilization efforts become necessary.'

Orszag said the figure was added into the budget 'in case the situation deteriorates.'

The Bush administration used similar placeholder figures for estimated Iraq and Afghanistan war costs in recent budgets, updating them with specific requests later.

An additional funding request would supplement the dwindling $700 billion financial bailout fund seen by analysts as spread thin among a growing number of support programs.

'If actually requested, it would raise the amount of resources available for recapitalizating banks from less than necessary to more than enough,' said Alec Phillips, a Goldman Sachs economist in Washington, putting the combined figure at around $1 trillion.

Bank stocks jump

News of more potential aid boosted bank stocks that have been beaten down by fears that the government may nationalize some large institutions.

But healthcare proposals in the budget sank shares of drug and other health-related firms, dragging major market indexes lower.

'I'm confident they'll have to come back and ask for more funding,' said Douglas Elliott, an economic studies fellow at the Brookings Institution in Washington.

'It would be really awkward for the government not to have some spare firepower. The last thing they want is to have a crisis of confidence and right in the middle of it have to go back to Congress.'

A new funding request would provide more resources for new bank stabilization programs proposed by Treasury Secretary Timothy Geithner.

Earlier this month, he proposed a new public-private investment fund to buy up to $500 billion to $1 trillion of illiquid assets from banks.

The plan is expected to provide long-term loans to private investors who are willing to buy assets, establishing benchmark prices for them.

On Wednesday, the Treasury pledged to provide the 20 largest US banks with sufficient capital - with no explicit limit - if a 'stress test' finds they need more funding to withstand a worse-than-expected recession.

The Treasury and Fed also will vastly expand a securities lending program to provide up to $1 trillion in new consumer credit.

US House speaker Nancy Pelosi on Thursday anticipated the administration would seek more funds, saying, 'We look forward to fleshing out what exactly that request will be.'

The $250 billion placeholder figure represents a proposed shift in the accounting treatment for the financial bailouts.

Under the bill authorizing the $700 billion Troubled Asset Relief Program last year, purchases were treated as expenses, regardless of the assets' value.

Orszag said the budget proposal would be more in line with the treatment used by the Congressional Budget Office, which he ran before Obama tapped him to join the White House.

In Jan


Tags: Obama | aid | US banks |

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