Geithner Extends TARP

Treasury Secretary Tim Geithner notified Congress Wednesday that he is extending the Troubled Asset Relief Program through October 3, 2010.

“This extension is necessary to assist American families and stabilize financial markets because it will, among other things, enable us to continue to implement programs that address housing markets and the needs of small businesses, and to maintain the capacity to respond to unforeseen threats,” Geithner wrote in a letter to House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid.

The Treasury Department will continue to use TARP funds to mitigate home foreclosures, provide capital to community banks, and take additional steps to boost lending to small businesses, Geithner wrote. The department also may increase its commitment to efforts to improve the secondary markets for consumer loans, small-business loans, and commercial mortgages.

Beyond these programs, the department will not use any remaining TARP funds “unless necessary to respond to an immediate and substantial threat to the economy stemming from financial instability,” Geithner wrote. “As a nation we must maintain capacity to respond to such a threat. Banks are still experiencing significant new credit losses, and the pace of bank failures, which tend to lag economic cycles, remains elevated.”

Geithner's letter comes as the White House focuses anew on creating jobs. President Barack Obama today met with a group of Democratic and Republican Congressional leaders to push for an agenda he laid out yesterday that includes tax breaks for small business, more spending on infrastructure, and breaks for homeowners who spend on energy efficiency.

"I'm not going to rest until…we put America back to work," Obama said this afternoon.

Geithner noted that many of the Federal Reserve programs and Federal Deposit Insurance Corp. programs that complemented TARP are ending.

“This creates a financial environment in which new shocks could have an outsized effect—especially if an adequate financial stability reserve is not maintained,” the letter stated.

Geithner promised to consult the president and Federal Reserve Chairman Ben Bernanke and notify Congress before using TARP funds to address shocks to the financial system.

Keeping TARP funds on hand to deal with such shocks “will bolster confidence and improve financial stability, thereby decreasing the probability that it will need to be used,” Geithner wrote.

The Treasury Department also anticipates up to $175 billion in TARP repayments by the end of next year. It also expects it won’t deploy more than $550 billion of the $700 billion allocated for TARP. Unused TARP funds will help the department reduce the federal deficit, according to Geithner.

The notice of the TARP extension came the same day as the program’s Congressional Oversight Panel issued a report concluding the program “played a critical role in renewing the flow of credit and preventing a more acute crisis.”

The report cautioned, however, that the financial-bailout program “created an implicit guarantee for major financial institutions that distorts pricing for capital and encourages excessive risk taking. Unwinding this guarantee poses a difficult long-term challenge.”

Plus, TARP failed to meet some of the broad goals set by Congress that went beyond addressing last fall’s immediate financial crisis. TARP’s foreclosure mitigation programs have not gone far enough, banks remain reluctant to lend, and commercial real estate problems continue to pose a threat to many banks, the panel noted.

The report also urged the Treasury Department to make its decisionmaking process and actions more transparent.

“Transparency and accountability may be painful in the short run, but in the long run they will help restore market functions and earn the confidence of the American people,” the report concluded.

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Kent Hoover is the Washington bureau chief for bizjournals.