Obama budget has new $750B bank rescue contingency

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WASHINGTON (AP) -- President Barack Obama is budgeting for a new $750 billion bank bailout this year, raising the prospect of a dramatic increase in the stake taxpayers already hold in the beleaguered financial sector.
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The White House's 2010 budget released Thursday includes a $250 billion contingency fund for 2009, the projected cost to the government of purchasing $750 billion in assets from banks in need of capital infusions.

In essence, taxpayers would foot the entire $750 billion up front. Administration budget writers predict the value of the assets that the government purchases would result in a loss of 33 cents for every $1 spent, hence the $250 billion net expenditure.

"We hope that it will not be necessary," White House budget director Peter Orszag said Thursday.

Still, the inclusion of the money is the clearest sign yet that Obama's economic team is not certain that the $700 billion Troubled Asset Relief Program that Congress approved last fall has done enough to unlock the capital markets and make credit more available.

If Obama asks Congress for the money, he would be placing much of his political capital on the line given the bipartisan antipathy toward the industry. House Speaker Nancy Pelosi reacted coolly to the possibility of a request, saying any new spending would have to meet standards of "accountability, transparency and insistence that the money be used to pump credit to the economy."

The financial sector welcomed Obama's contingency fund as a sign that the administration is prepared to back the industry. That alone, industry officials said, could build new investor confidence in the markets.

"The market has to perceive it to be well above what might be necessary," said economist Brian Bethune of IHS Global Insight. "Certainly if he says they're prepared to put up $750 billion, that sounds like a lot of resources."

The Obama administration still has more than $250 billion available from the original TARP funds to inject capital into banks. Whether it needs more could depend on whether economic conditions worsen and on the outcome of government evaluations now being conducted on the nation's biggest banks.

It is conceivable that some of the extra money -- if requested -- would be used to inject more capital into banks and for a soon-to-be operational public-private program to buy rotten assets held by banks, one official said. White House spokesman Robert Gibbs also conceded that the money could be used to assist General Motors Corp. and Chrysler LLC. The two automakers have received $17.4 billion in federal loans from existing financial rescue program. They are seeking an additional $21.6 billion to keep operating during the recession.

The banks, meanwhile, are undergoing "stress tests" to judge whether they have sufficient -- and the right mix -- of capital to survive an even deeper recession. The tests are expected to end in April.

Already, banking titan Citigroup Inc. has been in talks with the government about additional assistance, while insurance giant American International Group also is seeking more relief and is revamping its existing rescue package.

Obama signaled the possibility of a new bailout request to Congress in his address to lawmakers on Tuesday. Describing financial sector assistance already in the pipeline, Obama told Congress, "this plan will require significant resources from the federal government -- and, yes, probably more than we've already set aside."

The Troubled Asset Relief Program, or TARP, has proven to be an unpopular expenditure with the public and with many in Congress who believed the Bush administration pumped money into financial institutions with little accountability and with few strings attached. Since becoming president a month ago, Obama and the Treasury Department have taken steps to tighten conditions on beneficiaries of the funds.

The budget's projection that the government will incur a 33 percent loss on its investment in banks will likely dash any hope lawmakers harbored that the rescue plan could generate a profit for the government. Earlier this month, the TARP's Congressional Oversight Panel reported that the Bush administration overpaid for bank assets by 31 percent. And the Congressional Budget Office projected that the first $247 billion from TARP would come at a loss of $64 billion, or 26 percent.

Scott Talbott, a lobbyist with the Financial Services Roundtable, said the anticipated return of 66 cents on the dollar was conservative. "When the full strength of these programs is felt and the economy turns around, then the value will rise," he said. "I fully anticipate they will make a profit on their investment in the banks."

Others had doubts.

"These credit markets are just not working properly at this point, so we don't have very reliable market prices to know what these things are really worth," said Jim Wilcox, a professor of financial institutions at the University of California at Berkeley.

Robert Bixby, executive director of the budget watchdog Concord Coalition, said the uncertainty over the value of bank assets would have made budgeting the entire $750 billion more transparent than assuming some return on the dollar.

"That way everybody would see the money going out the door," he said.

Associated Press writers Jeannine Aversa, Daniel Wagner and Madlen Read contributed to this report.