U.S. Officials Signal No Need for More TARP Funds From Congress

By Timothy R. Homan and Robert Schmidt

April 20 (Bloomberg) -- Obama administration officials signaled there may be no need to request more financial-rescue funds from Congress as several banks plan to return taxpayer money and others are pushed to tap private markets first.

White House chief of staff Rahm Emanuel said while he had not seen results of stress tests on the 19 biggest banks, he believed “we won’t” have to get more money. Aide Lawrence Summers said “the first resort for more capital is going to the private markets,” by issuing new equity or swapping some liabilities into stock that dilutes other stakeholders.

The remarks yesterday indicate the administration isn’t girding for a battle with lawmakers who have warned that a popular outcry against aiding Wall Street means approval of an expansion of the $700 billion Troubled Asset Relief Program would be a challenge.

“We believe we have those resources available in the government as the final backstop to make sure that the 19 are financially viable and effective,” Emanuel said on ABC’s “This Week” program. He added that “we will be able to avoid” temporary nationalization of the weakest of the big banks.

Summers, National Economic Council director, said on NBC’s “Meet the Press” that “there’s the capacity to turn to the private market” first for firms needing more capital. The government can also deploy “if necessary” additional taxpayer cash, which is likely be buttressed “over time” by lenders “that are in the strongest position” of paying back U.S. money.

Scheduled Release

The stress tests are scheduled for release May 4, with the Federal Reserve and other regulators aiming to publish the methodology behind the assessments on April 24. The exams aim to ensure that the 19 companies, including Citigroup Inc., Bank of America Corp., GMAC LLC and MetLife Inc., have enough capital to weather a deeper economic downturn.

The U.S. Treasury and financial regulators are clashing with each other over how to disclose results from the tests, with some officials concerned about potential damage to weaker institutions.

There is no set plan for how much information to release, how to categorize the results or who should make the announcements, people familiar with the matter said. While the Office of the Comptroller of the Currency and other regulators want few details about the assessments to be publicized, the Treasury is pushing for broader disclosure.

Risk for Geithner

The disarray highlights what threatens to be a lose-lose situation for Treasury Secretary Timothy Geithner: If all the banks pass, the tests’ credibility will be questioned, and if some banks get failing grades and are forced to accept more government capital and oversight, they may be punished by investors and customers.

“There are plenty of ways to go wrong here,” said Wayne Abernathy, executive vice president of the American Bankers Association in Washington. “It might have sounded good at the time, but now looking back, it has far more risk than benefit.”

President Barack Obama said the tests will show “different banks are in different situations,” in a news conference in Trinidad and Tobago yesterday. He pledged that any new injections of government money won’t go “into a black hole where you aren’t going to see results or some exit strategy so the taxpayers ultimately are relieved of these burdens.”

Fed officials have pushed for the release of this week’s white paper on the methodology of the assessments in an effort to bolster their credibility. The central bank has been leery of inserting politics into the examination process, two people familiar with the matter said.

Regulators’ Concern

Regulators, all of which regularly administer exams to the lenders they oversee, have privately expressed concern about the tests and whether they will be effective, the two people said.

The 19 companies may get preliminary results as soon as April 24, a person briefed on the matter said.

While weaker banks deemed to need additional capital will be given six months to raise it, financial markets may have little more than six minutes of patience before punishing them if the information is publicly released, one official said.

The banks haven’t been consulted on how the information will be released and have raised the issue with the Treasury, three industry officials said on condition of anonymity.

Some banks “are going to have very serious problems, but we feel that there are tools available to address these problems,” David Axelrod, a senior White House adviser, said on CBS’s “Face the Nation” yesterday.

Transparency Goal

Geithner has said he crafted the stress test program in an effort to provide more transparency about the health of banks’ balance sheets.

The economy has worsened since the Treasury announced the tests in February, raising questions about whether the scenarios regulators are applying to bank portfolios are rigorous enough.

Under the assessments’ “more adverse” scenario, the unemployment rate is seen rising to 10.3 percent in 2010. When officials designed that scenario, the most-recent jobless rate was 7.6 percent. It has already soared to 8.5 percent since then.

There have been signs this year of some recovery in the banking industry. Goldman Sachs Group Inc. reported earnings on April 13 that exceeded analysts’ forecasts. The New York-based firm sold $5 billion in stock to help repay government capital injections.

JPMorgan Chase & Co. last week also reported profit that beat analysts’ estimates. Chief Executive Officer Jamie Dimon labeled the TARP program a “scarlet letter” and said the firm could repay the government “tomorrow.”

Banking lawyers and industry officials said the Treasury needs to be clear with the public about the reviews. Because of the intense interest from the media and investors, the government needs to “explain early and often” the purpose of the program, said the ABA’s Abernathy.

“It’s very possible that we are seeing the turning of the corner for the banking industry,” he said. “Our biggest fear is that it becomes a confidence-eroding episode at just the wrong time.”

To contact the reporter on this story: Robert Schmidt in Washington at rschmidt5@bloomberg.net; Timothy R. Homan in Washington at thoman1@bloomberg.net