Bank Test Results May Strain Limits Of Bailout Funding

By David Cho
Washington Post Staff Writer 

As the Obama administration works to complete its stress tests for gauging the 
health of major banks, it could 

confront another problem: how to pay for shoring up any weaknesses the tests 

No one yet knows the extent of the banks' needs. But a senior administration 
official said yesterday this will be 

clear once tests on the nation's 19 major banks are done and the results are 
released early next month. 

The administration would be hard-pressed to ask Congress for more rescue funds 
to plug the holes. Anger on Capitol 

Hill is high, especially after the furor over bonuses paid to employees at 
American International Group. The 

troubled insurer had earlier received more than $170 billion in bailout funds. 

But if the capital requirements of banks prove large, the government may need 
billions of dollars in federal aid 

back from strong financial firms, which have received that money within the 
past few months. The administration may 

even have to carve money from other rescue programs being funded from the $700 
billion bailout program

The task of coming up with money underscores the difficulties posed by the next 
phase of the government's immense 

effort to stabilize the financial markets. 

Some senior officials say they worry that allowing strong banks to return their 
bailout funds would stigmatize the 

firms that couldn't, scaring off their investors. Treasury officials overseeing 
the rescue effort are willing to 

take that chance, believing that the risk of such bank runs has receded in 
recent months as the financial system 

has become more stable, a senior administration official said. 

The official noted that while Wall Street executives have expressed worries 
about what the government will reveal 

about their internal conditions in the stress test, the markets have reacted 
positively as the date of the stress 

test results has approached. For instance, shares of banks both weak and strong 
have risen in recent weeks. 

The official added that some banks will be able to convert federal aid received 
last year into common stock, 

providing these firms the most important kind of capital they need. For that 
reason, some may not require new 

government investments. 

Still, the stress tests could show that the needs of the 19 banks are 
substantial, requiring administration 

officials to rely on bailout money being returned or even scale back other 
federal programs, government sources 

said on condition of anonymity because the stress tests are still in their 
early phases. 

Over the past few months, administration officials have outlined ambitious 
plans that leave them with $32 billion 

unallocated from the $700 billion financial rescue package -- far less than 
what officials expect to need for a new 

round of bank aid, the government sources said. 

Treasury officials say they may have as much as $110 billion left over because 
some of the initiatives are not 

drawing as much as participation as expected. Many firms have grown wary of 
taking federal aid, which requires them 

to cede a measure of control to the government and limit executive pay. 

In particular, a program to revive consumer lending, initially projected to 
soak up $100 billion in bailout funds, 

may only require $55 billion. The first round of direct government investments 
into banks, an initiative developed 

by the Bush administration, was projected to cost $250 billion, but may reach 
only $218 billion, even after 

including upcoming help anticipated for some ailing insurance companies. 

The Treasury Department also has a contingency plan in case a major financial 
firm collapses or the shortfall at 

the large banks proves far greater than anyone in the government now expects. 
In an emergency, the Treasury can 

move money out of previously announced programs. Currently, only $303 billion 
out of the $700 billion bailout 

program has been disbursed, officials said. 

Treasury officials say they conservatively project that at least $25 billion 
will be returned by recipients of 

government aid after the stress tests' results are unveiled. In recent weeks, 
several big firms have said they will 

pay back their money. Among them are Goldman Sachs, which received $10 billion, 
and J.P. Morgan Chase, which 

accepted $25 billion. 

Some analysts and officials worry that as strong banks return their government 
aid, other banks will feel pressured 

to overextend themselves in order to follow suit. Meanwhile, the weakest banks 
would be left behind and tarnished. 

A senior administration official said no firm will be allowed to pay back money 
without regulators ensuring that 

the bank is healthy and able to continue making loans to support economic 

Even if companies begin returning taxpayer money, some analysts and officials 
say the government may not have 

enough firepower to accomplish all the goals of the bailout effort, which 
include buying banks' toxic assets, 

stabilizing the banking system, reviving consumer lending and helping 
struggling homeowners and small businesses. 

Senior administration officials have said it is likely they may need to ask 
Congress for more money, but they say 

such a request probably wouldn't come anytime soon. 

In addition, a firestorm over $165 million in bonuses paid to a troubled 
division of AIG has made the task of 

asking for more money extremely difficult, officials said. 

The senior administration official said fears over another firm melting down 
like AIG -- whose near collapse last 

fall threatened the entire financial system -- has significantly diminished. 
The government demonstrated it will 

prevent any of the nation's most important banks from failing, spending a total 
of more than $90 billion to prop up 

Citigroup and Bank of America. 

The stress tests will also help assure the markets that no other major bank 
will face a fate similar to AIG. 

The tests aim to identify the precise areas of need within the banks and 
provide targeted capital to heal those 

businesses, the senior official said. They also will provide a clear view of 
the firms' problems, helping to dispel 

the uncertainty hanging over the financial system. 

"The penalty for opacity or lack of clarity is almost always worse than the 
truth," the official said.



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