President Barack Obama anticipates another $750 billion bank bailout this year, a step that would more than double the direct infusion of taxpayer money into the reeling financial sector.
The White House's 2010 budget released Thursday includes a $250 billion contingency fund for 2009 that — if needed — could leverage three times as much in asset purchases from financial institutions in need of capital.
In essence, however, taxpayers would foot the entire $750 billion up front. Administration budget writers say the value of the assets that the government has already acquired suggest a return to the government of 66 cents for every $1 spent, hence the $250 billion net expenditure.
"We hope that it will not be necessary," White House budget director Peter Orszag said Thursday. "We have no plans to go to Congress at this point to ask for additional money. ... The placeholder is in case the situation deteriorates further and more intervention is necessary."
Still, the inclusion of the money is the clearest sign yet that Obama's economic team is not certain that the $700 billion Troubled Asset Relief Program that Congress approved last fall has done enough to unlock the capital markets and make credit more available.
In adding the $250 billion contingency to the 2009 projected spending, the members of Obama's budget team increased their own deficit forecast for the year from a record $1.5 trillion to a soaring $1.75 trillion.
Obama signaled the possibility of a new bailout request to Congress in his address to lawmakers on Tuesday. Describing financial sector assistance already in the pipeline, Obama told Congress, "this plan will require significant resources from the federal government — and, yes, probably more than we've already set aside."
The Troubled Asset Relief Program, or TARP, has proven to be an unpopular expenditure with the public and with many in Congress who believed financial institutions received the money with little accountability and with few strings attached. Since becoming president a month ago, Obama and his Treasury Department have taken steps to tighten conditions on beneficiaries of the funds.
The Obama administration still has more than $250 billion available from the original TARP funds to inject capital into banks. Whether it needs more could depend on whether economic conditions worsen and on the outcome of "stress tests" now being conducted on the nation's biggest banks.
It hasn't been predetermined how the money would be used, according to an administration official familiar with the provision. The official spoke on condition of anonymity because of the sensitive, ongoing nature of the administration's bank rescue efforts.
Still, it is conceivable that some of the extra money — if needed — would be used to inject more capital into banks and for a soon-to-be operational public-private program to buy rotten assets held by banks, the official said.
The stress tests, which started Wednesday and are supposed to be completed by the end of April, are being conducted to judge whether banks have sufficient — and the right mix — of capital to survive an even deeper recession.
Federal Reserve Chairman Ben Bernanke told Congress on Wednesday the test results will mean some banks will need more government help but others won't.
Banking titan Citigroup Inc. has been in talks with the government about additional assistance, while insurance giant American International Group also is seeking more relief and is working with the government to revamp its existing rescue package.
Obama and his aides have made much of how they are using more honest methods that are making the budget bigger. But in this case, the White House's accounting has made the bailout figure smaller.
The Congressional Budget Office and the new team at the White House Office of Management and Budget is counting the bailout expense as the purchase of an asset with potential value. CBO last month, for example, projected that the expenditure of nearly $250 billion in Troubled Asset Relief Program funds actually amounted to a $64 billion subsidy, meaning the government could expect to get nearly 78 percent of its investment back. OMB calculates a less optimistic pay back of 66 percent.
"Honest budgeting suggests that when you pay a dollar for a financial asset that doesn't make the government worse off by a dollar, it's not the same thing as a net cost of a dollar because you are getting something in exchange for it," Orszag said.