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Stimulus Battle May Signal Tough Sell for Obamaâ€™s Bank Rescue

08 February 2009 09:13 (UTC +04:00)

Bloomberg - President Barack Obamaâ€™s struggle to push an economic stimulus bill through Congress may seem easy compared to what heâ€™ll encounter when he returns to Capitol Hill for additional funds to rescue the banking system.

Obama will likely need to ask Congress for more money to recapitalize banks, as much as $1 trillion on top of the roughly $300 billion remaining in the current Troubled Asset Relief Program, according to an estimate by former Federal Reserve economist Ward McCarthy. That will be an even tougher sell for the new president than the stimulus plan, which is headed for a Senate vote this week after passing the House with no Republican support.

That package, at least $780 billion of spending and tax cuts aimed at boosting consumer demand and creating jobs, is just a part of what it will take to pull the economy out of the 14- month-old recession. The stimulus will be effective only if credit markets, currently frozen by illiquid assets clogging banksâ€™ balance sheets, begin to function again.

â€œIt will take an enormous effort to build broader public supportâ€ for another bank rescue plan, said Thomas Mann, a congressional scholar at the Brookings Institution in Washington. â€œHad the stimulus gone through swimmingly it would have made it easier.â€

Geithnerâ€™s Speech

Treasury Secretary Timothy Geithner has scheduled a speech tomorrow to outline new steps that include fresh capital injections into banks and ways to deal with toxic securities still on their balance sheets, according to people familiar with the matter.

Treasury will probably propose a combination of buying toxic bank assets, providing guarantees for other assets, and making additional capital infusions to banks, said McCarthy, now a principal at Stone & McCarthy Research Associates, an economic research firm in Skillman, New Jersey.

â€œThe remaining TARP funds are not going to be enough for the job,â€ said McCarthy, who estimates that up to $1.5 trillion in government aid will be needed to save the banking system. â€œIf they want to get the job done, they will have to scrape up more cash,â€ said McCarthy.

New funding for the banking system will be all the harder to justify because the original TARP, which so far has provided almost $400 billion to more than 360 banks, hasnâ€™t shown much in the way of tangible benefits.

â€˜Insanityâ€™

â€œThey continue to assume that if you do something and it hasnâ€™t worked, you have to continue to do more of it,â€ said Representative Darrell Issa, a Republican from California. â€œThatâ€™s the definition of insanity.â€

Obama and his staff struggled last week to win support for the stimulus package from several moderate Republicans in the Senate, including Susan Collins and Olympia Snowe of Maine and Arlen Specter of Pennsylvania.

Support for another round of cash for ailing banks may be even tougher to win after reports last week raised new questions about the cost and effectiveness of the assistance provided already.

The chairman of the TARPâ€™s Congressional Oversight Panel told the Senate Banking Committee that Treasury paid $254 billion of TARP funds for bank equity worth $176 billion, an overpayment of $78 billion. And even after the infusions of taxpayer funds, a majority of U.S. banks still made it tougher for consumers and businesses to get credit at the end of 2008, a Feb. 2 Federal Reserve report showed.

â€˜Fool Me Onceâ€™

Such findings give ammunition to lawmakers such as Utah Republican Senator Bob Bennett of Utah who say they were misled about how the TARP would work.

â€œCan we believe what we are told next time?â€ Bennett said at the Senate committee hearing. â€œThose of us who decided we were going to take the political risk of voting for this the first time will be faced with a constituency that will say, â€˜Fool me once, OK, but donâ€™t fool me twice.â€™â€

Other lawmakers may balk at the idea of providing more rescue funds after hearing of banks that took billions in taxpayer money and continued to provide bonuses and lavish perks to employees.

New York financial institutions doled out $18.4 billion in bonuses last year, the sixth-biggest haul in history. A Merrill Lynch & Co. executive spent $1.2 million to redecorate his office while the company accepted $10 billion in government funds. Insurer American International Group Inc. hosted a $440,000 conference at a California resort in September after agreeing to a federal bailout.

â€œIt will be harder for Obama to keep all the Democrats on board,â€ said Washington-based political analyst Stuart Rothenberg.

Stimulus â€˜Hangoverâ€™

Not only will they resist the idea of additional money for banks, Rothenberg said, â€œbut there may be some sort of hangover from the stimulus bill, with Democrats feeling as though the Senate compromised too much to get two or three Republican votes.â€

The original TARP legislation failed to pass the House by a dozen votes on Sept. 29, sending the Dow Jones Industrial Average down 777 points. It was approved on a second attempt after several lawmakers changed their votes.

This time around fiscally conservative Blue Dog Democrats, troubled by another piece of legislation with a price tag in the hundreds of billions of dollars, may be the biggest obstacle for Obama.

â€œBlue Dog Democrats and Republicans will line up to tell Obama, youâ€™ve got to do better than to say, â€˜give us the money and trust us,â€™â€ said Representative Issa.

Public-Relations Push

Obama has already begun a public-relations push to build popular support for additional bank bailouts. Last week he introduced new executive pay guidelines for financial institutions needing government help to remain solvent. They included a $500,000 cap on executive pay and new disclosure rules on perks like corporate jets and holiday parties.

In addition, he continues to ratchet up his rhetoric on extravagant bank compensation and perks.

â€œFor top executives to award themselves these kinds of compensation packages in the midst of this economic crisis is not only in bad taste, itâ€™s a bad strategy, and I will not tolerate it as president,â€ Obama said when he announced the new restrictions on Feb. 4.

Heâ€™ll also have to make any new financial rescue plan look starkly different from TARP, said Stan Collender, a former analyst for the House and Senate budget committees, now at Qorvis Communications in Washington.

â€œThe new plan has got to have a different goal, a lot more for homeowners and individuals,â€ said Collender. â€œItâ€™s got to be more than banks holding on to the money.â€