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Scope of $700 billion bailout bill continues to widen

The Treasury may back risky mortgages and include other industries in its financial rescue effort.

By Staff writer of The Christian Science Monitor / October 27, 2008


The US government's $700 billion financial rescue effort is only a few weeks old – but it's already morphed into something far broader and more ambitious than its designers originally intended.

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The speed and severity of the nation's economic problems simply may have forced it to change. First, the Treasury added direct investment in banks to its plan to buy up troubled mortgage-based assets. Second, it now seems primed to partially guarantee some home mortgages in an effort to stem a rush of foreclosures sweeping through US neighborhoods.

Further modifications could be coming. Insurance and auto companies want some bailout money, too. Other industries may clamor to be included, particularly if Congress holds a postelection, lame-duck session to consider additional moves.

"There's no principled way to say 'no' until they've run out of money," says Gerald O'Driscoll, a senior fellow at the Cato Institute and former vice president at the Federal Reserve Bank of Dallas.

The federal government in fact may still be able to set limits on who or what needs to be rescued. But in any case, given the financial turmoil that has swept through the globe this October, a $700 billion commitment that seemed large at the beginning of the month appears smaller at the end.

At a Senate Banking Committee hearing on Oct. 23, Neel Kashkari, the interim assistant Treasury secretary overseeing the bailout, said the US remains committed to the plan's first intention – the purchase of bad mortgage-based securities that are cluttering the books of financial institutions.

The Troubled Asset Rescue Program, or TARP, has begun hiring key staff. But the Treasury hasn't actually bought any bad loans yet and is still figuring out the process for doing so. Meanwhile, it has moved ahead with a shotgun infusion of cash into the nation's nine largest banks.

Twenty-two smaller regional banks now are also slated to receive government money. On Oct. 24, Treasury officials backed off a plan to publicize the list of these banks, as some institutions felt it would brand them as unhealthy.

One deal did go public, however. PNC Financial announced that a government infusion of $7.7 billion had paved the way for its Oct. 24 purchase of a loss-ridden Cleveland bank, National City.

Treasury secretary Henry Paulson once said that direct government purchase of financial institution stock would represent "failure." But capital markets deteriorated much faster than the Treasury had anticipated in mid-August, and the US needed to do something – anything – fast.