Banks could get $750 billion more under Obama budget

WASHINGTON Thu Feb 26, 2009 7:48pm GMT

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WASHINGTON (Reuters) - President Barack Obama could funnel up to $750 billion (524 billion pounds) in fresh government aid to the battered banks, more than doubling a financial bailout approved last year, his proposed budget revealed on Thursday.

The White House pencilled in a $250 billion "placeholder" amount for additional financial rescue efforts into the fiscal 2010 budget, but said this would represent the net cost of asset purchases from financial institutions.

It estimated a loss of 33 cents of every investment dollar, so if it invests $750 billion in bank shares or other assets, the cost to taxpayers would be only one-third of that amount.

But administration officials were quick to say that they may not ask for any new funds.

"We have no plans to go to Congress to ask for additional money, and again the hope is it will not be necessary," White House budget director Peter Orszag told a news briefing. "But just in case it is, the budget includes a placeholder should further stabilization efforts become necessary."

Orszag said the figure was added into the budget "in case the situation deteriorates".

The Bush administration used similar placeholder figures for estimated Iraq and Afghanistan war costs in recent budgets, updating them with specific requests later.

BANK STOCKS JUMP

News that the financial sector could get additional taxpayer funds lifted stocks, especially bank shares that have been beaten down by fears that the government may nationalize some large institutions as losses consume their capital.

Shares in Bank of America and JPMorgan Chase were both up more than 8 percent, while Citigroup shares jumped briefly before retreating to trade nearly 1 percent lower by early afternoon.

"The administration delivered just what the market wanted, which was government help, but not overt nationalization. That seems to be the magic wand for the stock market at the moment," said Cary Leahey, an economist at Decision Economics in New York.

An additional funding request would supplement a financial bailout fund that some analysts had viewed as spread thin among a growing number of support programs.

U.S. Treasury Secretary Timothy Geithner earlier this month proposed a new public-private investment fund to buy up $500 billion to $1 trillion of toxic assets from banks in an outline of a broad financial stabilization plan.

And Wednesday, the Treasury pledged to provide the 20 largest U.S. banks with sufficient capital -- with no explicit limit -- if a "stress test" finds they need more funding to withstand a worse-than-expected recession. Banks will have six months to find private capital or turn to the government.

Obama said in a major speech to Congress on Tuesday night that cleaning up the bad debt will cost the federal government "probably more than we've already set aside."

U.S. House speaker Nancy Pelosi on Tuesday anticipated the administration would seek more funds, saying, "We look forward to fleshing out what exactly that request will be."

BAILOUT ACCOUNTING SHIFT

The $250 billion placeholder figure represents a proposed shift in the accounting treatment for the financial bailouts. Under the bill authorizing the $700 billion Troubled Asset Relief Program, or TARP, last year, purchases were treated as expenses, regardless of the assets' value.

Orszag said the budget proposal would be more in line with the treatment used by the Congressional Budget Office, which he ran before Obama tapped him to join the White House.

In January, the nonpartisan CBO estimated that the "subsidy cost" of $247 billion in TARP investments in 2008 at $64 billion.

Additional bailout funds also could be leveraged to buy toxic mortgage assets from banks under Geithner's emerging public-private asset fund. The government under the plan expected to provide long-term loans to private investors who are willing to buy illiquid mortgage assets, establishing benchmark prices for them.

The administration is expected to detail more about its bailout funding needs by the end of April, when the bank stress tests are due for completion, and as the Treasury finalizes more details about its stabilization plan in coming weeks.

(Additional reporting by Jeff Mason in Washington and Ellen Freilich in New York; Editing by Jonathan Oatis)

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