Financial Reform Watch

Treasury Submits First Report to Congress on Bailout Fund Operations

On Wednesday, just one day after Senator Barack Obama won the presidency, the Treasury Department detailed how it planned to borrow a record $550 billion before the end of this year to back the bailout. Treasury said it would sell $55 billion in bonds next week, including a reintroduction of the three-year note—all part of a massive borrowing effort required because of the cost of the bailout and a budget deficit that some believe could hit nearly $1 trillion next year.
The government's surging financing needs are a stark reminder of the challenges awaiting the Obama Administration even as the current administration moves to implement its rescue program and the Fed fine-tunes its approach to the crisis. Treasury Secretary Paulson has pledged to work with incoming administration to ensure a smooth transition.

Treasury gave Congress its first report on the operation of the bailout fund, detailing the $125 billion the government spent last week to buy stakes in nine of the country's largest banks. The bailout legislation requires Treasury to issue reports each time its spending passes a $50 billion marker.

The first tranche report described all the transactions made during the reporting period, the deals' pricing mechanisms and an explanation of the costs, the arrangements' impact on the financial system, remaining challenges, and estimates for addressing such challenges. These initial transactions were made under the Capital Purchase Program, or CPP, its first effort under the Emergency Economic Stabilization Act to inject capital into the ailing financial industry in order to spur banks to resume more normal lending.

According to government and industry officials, the federal government is preparing to take tens of billions of dollars in ownership stakes in an array of companies outside the banking sector, dramatically widening the scope of the Treasury Department's rescue effort beyond the $250 billion set aside for traditional financial firms. Treasury officials are still finalizing the new program, which could ultimately involve hundreds of billions of the $700 billion rescue package, though the initiative is unlikely to be announced until the end of next week at the earliest. The new initiative would make it easier for the Treasury to aid a wider variety of firms if their troubles put the wider financial system at risk. These companies would still have to be financial firms that fall under federal regulators.

Department officials have also indicated that they are planning to buy banks' illiquid holdings under the Troubled Asset Relief Program, or TARP, a plan originally cast as the centerpiece of the banking sector bailout. Treasury has also confirmed that it is contemplating rules that would allow privately held banks to participate in the CPP, though the timing for those rules is uncertain.

In other news, the Bush administration is hopeful that world leaders, at a summit in Washington next week, will adopt an action plan singling out some short-term steps that could be taken to deal with the current financial crisis as well as prevent similar problems from happening again. According to the White House, the plan could include measures aimed at promoting more openness—or transparency—in financial markets, improving "risk management," the procedures that financial institutions follow to detect and protect themselves against risky investment decisions, and bolstering accounting rules.

At the other end of Pennsylvania Avenue, Senate Banking Chairman Christopher Dodd (D-CT) indicated yesterday that he plans to remain at the helm of the panel and not take the chairmanship of the Foreign Relations panel, which Sen. Joseph Biden (D-DE) will vacate to become Vice President. With the fallout from the banking crisis, Dodd said his top priority will be a major bill next year to modernize the nation's financial regulatory structure.


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