President Barack Obama’s signing today of the biggest U.S. financial-rules overhaul since the Great Depression will be a “major watershed” for the government’s bailout programs, a Treasury Department official said.
The legislation gives regulators tools to avoid the need for future rescues such as the $700 billion Troubled Asset Relief Program, said Herbert Allison, the Treasury’s assistant secretary in charge of the program, in a telephone interview yesterday. The new law will also forbid the Treasury from starting new programs and limits the funding available to existing efforts.
“TARP was unpopular but it was necessary,” Allison said in the interview. “Now the government is going to have much better tools.”
The bank rescue, enacted in October 2008, had allocated $535.5 billion of its available funding, Allison said. When the new law takes effect, that amount will be limited to $475 billion, based on cuts in the amount of funding available to housing, the auto industry and small-business lending programs.
Douglas Elliott, a research fellow at the Brookings Institution who specializes in banking, said shrinking TARP is a victory for the Obama administration.
“I don’t think this is budget games,” Elliott said. “It’s as if the budget had expected to buy 1,000 tanks and they end up deciding to buy 900 tanks -- that is a savings.”
At the same time, the Treasury’s Office of Financial Stability is planning how to manage the Treasury’s ongoing investments in housing and the banking system, Allison said.
“We have to be making sure we’re protecting the taxpayers throughout this entire program,” said Allison, the former chief executive officer of Fannie Mae and TIAA-CREF. “We’re going to have, for a long time to come, staffing within the office of financial stability.”
The Treasury’s estimates of TARP’s long-term costs are unchanged at $105 billion, primarily in housing aid and losses from assistance to automakers and American International Group Inc.
Allison, 66, said there are still more than 600 banks participating in the capital injection program, even though the Treasury has regained about 75 percent of the $205 billion it invested through that program. The Treasury also is continuing to invest money to community development banks through an $800 million program launched this year.
To adjust to the new legal limits, the Treasury has shrunk the amount of money available for some TARP initiatives. The total auto industry aid program has shrunk by $3 billion to $81.8 billion, and the Public-Private Investment Program is set at $22.4 billion, $8 billion less than initially planned.
The Home Affordable Modification Program has a total possible amount of $45.6 billion, down $3.2 billion from earlier plans.
“HAMP is the first large national program that’s been designed to provide substantial relief in terms of affordability of homeownership,” Allison said. “It will be seen in retrospect as having set new standards for the industry.”
By limiting the TARP program’s flexibility, Congress is taking on some risk that the government won’t be able to respond quickly if the economic recovery hits a snag, said Joseph Mason, a finance professor at Louisiana State University in Baton Rouge. Even though TARP was not perfect, it did allow regulators to recapitalize the banking system quickly, he said.
“It’s not clear that we’re out of this crisis,” Mason said. “We could very well need more.”