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Paulson Lets Bailout Play Out
Given Paulson's tarnished credibility, asking Congress for more funds may prove too difficult.
November 20, 2008
WASHINGTON—Phase 1 of the bailout is apparently over.
Treasury Secretary Henry Paulson made it clear this week he has no intention of asking Congress for the remaining $350 billion authorized for the Troubled Asset Relief Program.
Barring a fresh disaster, he may not even deploy the $60 billion remaining from the first installment.
With two months left in the Bush administration's term, Paulson appears content to watch what he has put in place play out. He felt comfortable enough to tell Congress Tuesday that the worst is over.
"We've turned a corner … stabilizing the system and preventing a collapse," he said.
But Paulson's reluctance to seek more funds may be as much political as practical. Seeking more money would invite a confrontation with lawmakers from both parties, who have expressed exasperation with Paulson's rapid reversal on the program's purpose and his failure to create a loan modification plan.
"The odds are against him asking for it because it could get denied," said Scott Talbott, the senior vice president of government affairs at the Financial Services Roundtable. "He doesn't have a definite plan, and I think it makes sense to let the next administration handle it and let the current TARP money that has been distributed have an effect."
The TARP program requires the Treasury to give Congress a plan detailing how it would use the last $350 billion. Congress has 15 days to block transfer of the funds.
Selling any new plan for using the money would be difficult for Paulson, who has already stunned Congress by abandoning the program's original purpose—buying troubled assets—in favor of direct capital injections.
"Congress would be quite skeptical, and appropriately so," said Michael Barr, a senior fellow at the Center for American Progress and a former Clinton Treasury official. "Fool me twice, shame on me. I think Congress is likely to be deeply skeptical, and I think that would be appropriate."
Paulson got a bipartisan tongue-lashing from members of the House Financial Services Committee Tuesday, with many openly questioning his credibility.
Though Paulson expressed optimism that the worst was over, observers are not so sure.
"Nobody has a clue," said Karen Shaw Petrou, the managing partner of Federal Financial Analytics. "Markets remain so volatile, credit market conditions so fragile, that any directional conclusions are premature."
Paulson has made bold claims before. In July, he asked Congress to give him added authority over the government-sponsored enterprises, saying it would never have to be used. Less than two months later, the government used this power to seize Fannie Mae and Freddie Mac.
In September, Paulson said direct capital injections would not be as effective as buying banks' troubled assets. Less than a month later, he concluded the opposite was true.
Given his low standing with Congress, asking for funds may be more trouble than it is worth, observers said.
"He's probably reading the tea leaves and concerned that he may be getting signals from Congress, 'if you come up here and ask for it, you may be forced to defend a lot they don't like about the program,'" said Bob Clarke, a senior partner at Bracewell & Giuliani and a former US Comptroller of the Currency.
Even if Congress gave him the funds, it would be likely to add restrictions. Lawmakers have said the Treasury, for example, should force banks that get capital injections to use the money for new lending.
"It could be a very time-consuming and difficult process, and I think he'd rather let the new administration go before Congress and go through that process," said Mark Zandi, the chief economist and a co-founder of Moody's Economy.com Inc. "Congress would ask a lot of questions, and they already are … I'm sure they would attach strings and other use of the money going forward."
Paulson also still has plenty of money to play with. He has doled out $190 billion of the $250 billion allocated for capital injections in banks and spent $40 billion to buy stock in American International Group. This leaves about $120 billion that could be invested elsewhere.
Four insurers announced plans to buy thrifts last week and filed applications by the Nov. 14 deadline to get some of the Treasury's TARP cash.
Though Paulson said Tuesday that he is not planning additional capital injections with the remaining funds, he could change his mind during the next two months.
"There is room for [insurance companies] in the current $350 billion," said Shaw Petrou. "There is room for some of the nonbanks. Maybe I'm old-fashioned, but that's still a lot of money to use in variations on the capital injections."
Paulson has also stressed the need to leave money for President-elect Barack Obama and his new economic team. The Obama transition team has yet to hint how it would use the $350 billion it stands to get.
"We have done what was necessary as facts and conditions in the market and economy have changed, adjusting our strategy to most effectively address the urgent crisis and preserving the flexibility of the President-elect and the new Secretary of the Treasury to address the challenges in the economy and capital markets they will face in the coming months," Paulson said Tuesday.
Observers agreed that this is the right move, since the Obama administration may wish to spend the money in different ways than Paulson.
"There's some desire on the part of the Obama team to reserve that unused portion and apply it to a mortgage relief and foreclosure prevention program next year," said Andrew Parmentier, an analyst at the FBR Capital Markets unit of Friedman, Billings, Ramsey Group. "The Obama team sees better use of the capital in a loan modification program."
In fact, Paulson has resisted repeated calls to allocate $24 billion to a loan-modification program developed by the Federal Deposit Insurance Corp.
Barr, the former Clinton Treasury official, welcomed letting President-elect Obama shape the use of the remaining funds.
"The first choice would be for the administration to reverse itself and have a broad-scale [loan] restructure facility," he said. "Given the fact that they are not going to do that, I think it's more prudent to hang on to the funding and do it right when the new administration comes in."
Jaret Seiberg, an analyst at Stanford Group Co., said a hiatus in new government programs for two months may help reassure the market, which has had to adjust rapidly to Paulson's new plans.
"What we need now is few announcements and more implementation," he said.
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