TARP: Treasury Looks to Shift Rescue's Focus To Small Businesses and Community Banks

By Neil Irwin and David Cho
Washington Post Staff Writers
Friday, September 11, 2009

The Obama administration is retooling its rescue of the financial system, looking to wind down programs viewed as having run their course while considering new initiatives to address areas of lingering concern, such as small businesses and community banks.

This shift comes as Treasury Secretary Timothy F. Geithner and his colleagues are trumpeting their stewardship of the federal bailout efforts, as they did Thursday in a series of remarks on Capitol Hill and to the press. President Obama is scheduled to give what the White House called a major address on the financial crisis on Monday, the one-year anniversary of Lehman Brothers' collapse.

"The emerging confidence and stability of September 2009 is a far cry from the crippling fear and panic of September 2008," Geithner told an oversight committee Congress created to monitor the $700 billion Troubled Assets Relief Program. It is clear, he said, "that such a turnaround was not inevitable, nor was it an accident. It happened because the Obama administration and Congress put in place a comprehensive strategy."

The federal bailout program is scheduled to expire at the end of the year unless Geithner sends a letter to Congress stating that the efforts must be extended. Geithner is highly likely to make this assertion, though the administration would like to take that step with at least tacit support from Congress, administration officials said.

Geithner and his team are weighing how and when to send the letter and have been in talks with the White House about how to broach the topic with Congress. Administration officials want to be sure their reasoning is made clear. The legislation authorizing the bailout says the Treasury secretary must provide "a justification of why the extension is necessary to assist American families and stabilize financial markets, as well as the expected cost."

As the rescue moves into a new phase, a Treasury Department program to support money-market mutual funds, put in place during the dark days of the financial crisis last fall, is scheduled to expire Sept. 18, and Geithner will not move to extend it, he said Thursday. And the Federal Deposit Insurance Corp. is weighing how to wind down its program to guarantee bank debt, which was a critical support to banks last fall but has become less widely tapped.

The Treasury is beginning the same delicate process the Federal Reserve has already started: trying to pull back from the government's extraordinary involvement in the private sector while not moving so fast as to reignite a crisis.

"Our policies have been sufficiently successful that we can begin planning to reduce the government's direct involvement in the financial sector, but we must move cautiously or risk a relapse," said a Treasury document given to reporters Thursday.

About $365 billion of the bailout has been disbursed for a range of programs, and $70 billion has been returned to the Treasury. The Treasury has also made $12 billion in returns on its investments, and the department expects $50 billion or so more to be returned in the coming months. The administration's calculations do not include potential losses on some of the largest investments, such as those in Citigroup and American International Group.

The administration is weighing what to do with the remaining funds and expects to roll out plans this fall. None of these initiatives, however, is expected to be as expensive as the emergency steps taken last year to save big financial companies, administration officials said. One of the government's priorities is a program to support small-business lending. Though this effort was announced in February, it's taken Treasury officials months to resolve several nettlesome issues. Some top administration officials have been wary of a separate idea of using bailout funds to expand an existing Small Business Administration program to spur lending to businesses.

The administration is also developing an initiative to inject capital into community banks, which have played a crucial role in lending for commercial real estate, according to sources familiar with the planning. But many of those banks, by virtue of their size and lack of diversified business operations, are at greater risk of failure than their larger counterparts. That means a greater chance the government could lose its investment.

The Treasury is also moving forward with a long-delayed program to buy troubled assets from banks, an initiative announced in February. This effort has become less urgent after major banks succeeded in raising private capital this spring. But Treasury officials say the program could still be important in preventing a renewed crisis.

At the oversight hearing Thursday, the tone was more polite than at some of Geithner's previous Capitol Hill appearances. Members of the panel agreed that progress had been made in repairing the financial system. Many focused their questions on understanding the strengths and weaknesses of different rescue programs.

As evidence of the federal rescue efforts' progress, the Treasury pointed to lower rates for businesses and consumers -- the rate on a 30-year, fixed-rate mortgage has dropped 0.75 percentage points in the past year, and rates for auto loans are down six percentage points. Corporate borrowing costs are down 1.8 percentage points.

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