Scope of $700 billion bailout bill continues to widen
The Treasury may back risky mortgages and include other industries in its financial rescue effort.
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"Buying equity was a faster way to put capital in the system," Mr. Kashkari told the Senate Banking panel.Skip to next paragraph
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Going forward, the Treasury can't predict how much of its effort will be devoted to purchasing bad assets and how much to directly injecting equity, he said.
Not all lawmakers are happy about the metamorphosis of the bailout effort. It's true that Mr. Paulson has wide latitude to do as he sees fit under the terms of the rescue legislation signed into law by the president on Oct. 3. But the use of government cash for acquisitions of other banks – as was the case with PNC – or for pay ment of dividends to investors may raise questions in Congress.
Such uses are allowable under rescue bill provisions. They don't necessarily help jump-start lending to cash-starved US businesses, however.
The next tool the Treasury acquires may deal directly with mortgages. The Bush administration is now working on a plan under which the US would share the risk on refinanced home loans, and Democrats in Congress are pushing hard for such a move. Plus, the foreclosure trend is getting worse.
The US would also set standards for banks to follow in reworking mortgages to make them more affordable. These could be modeled after an existing Federal Deposit Insurance Corp. (FDIC) program for troubled homeowners at the now-federalized IndyMac bank, which failed in July. About 4,000 IndyMac borrowers have benefited from this program so far, saving an average of $430 per month.
Moreover, homeowners might not be the end of it, as far as TARP is concerned. The insurance industry has lobbied for inclusion in the rescue effort, as well. While insurance firms appear to own fewer of the bad mortgage-based assets at the heart of the financial meltdown, several reportedly are now struggling to raise enough capital to keep credit ratings and meet regulatory requirements.
Auto firms want in, too. They argue that their credit arms are vital financial institutions now suffering from a cash-flow crisis.
On Oct. 24, the Financial Services Roundtable, a trade association, sent the Treasury a letter arguing that the government needs to consider investments in a broader range of companies, including broker-dealers, auto companies, insurance firms, and foreign banks.
It's unsurprising that the bailout effort has expanded, because the US financial system is a complicated network of many different kinds of institutions, say some economists.
But the pressure to load more and more into the system may increase pressure to raise the ceiling on the number of tax dollars at risk.
"I bet they double it before they're through," to $1.4 trillion, says Mr. O'Driscoll of the Cato Institute.