Asking For TARP Capital That Is Not There

The Administration is almost certainly going to have to go to Congress to ask for more capital for the TARP. It will have as its new point man Herb Allison, an old Wall St. hand and current head of Fannie Mae (FNM)

Congress is sullen and not likely to part with money. It is skeptical about the money already lent out and handed out by the Treasury. Voters want to know why they are paying for a program that does nothing to help their small businesses, mortgages, car loans, and credit card debt. They are right to be mutinous. The money that the banks have received has gone to helping shore up balance sheets, pay banker’s salaries, and create pools of money that many be used to buy troubled assets from other financial institutions.

According to the FT, “Rising unemployment is increasing the pressure on US authorities to take a tougher stance in judging the results of bank stress tests, a development that ultimately could force leading financial groups to hold more capital.” Since unemployment is going to top more than 10% and housing prices are going to keep collapsing as foreclosures rise and demand stays anemic, the banks are going to need the extra cash.

The government is hoping that private equity will put up what the banks will need as a result of stress test figures. That is a wild dream. Banks with low scores will not be desirable investments, so the money will have to come from the government or not come at all.

The solution to the bank mess may turn on Congress agreeing to give the Treasury more money. With a record national budget deficit, a huge stimulus package, and money about to go toward improving mortgage defaults, there is nothing left.

Douglas A. McIntyre