Bankers Concerned About Bailout’s Lack of Exit Strategy

October 20, 2008 - 10:49 PM
Bankers fear that the federal government's involvement in banks under the $700 billion financial bailout may not end anytime soon – or very easily.

Treasury Secretary Henry Paulson (AP Photo)

(CNSNews.com) – Bankers fear that the federal government’s involvement in banks under the $700 billion financial bailout may not end anytime soon – or very easily.
 
The Treasury Department, they say, is giving indications that banks may have a hard time getting out of the government program.
 
Wayne Abernathy, executive vice president of the American Bankers Association, expressed concern that the bailout’s Capital Purchase Program (CPP) may become a long-term effort.
 
“They don’t want banks getting out of it too quickly, apparently,” he told CNSNews.com.
 
Under the Capital Purchase Program, announced last week, Treasury is buying $250 billion in non-voting stock – “troubled assets” – in nine major banks.
 
“(Banks) can only get out if they’re replacing the Treasury capital with some other form of capital, another shareholder option, which is probably a little hard to get right now,” Abernathy said.
 
He pointed out that there is no provision in the overall legislation, the Emergency Economic Stabilization Act of 2008, requiring the Treasury Department to ever end its bailout activities.
 
“There’s nothing in there that I’ve seen, that says the Treasury couldn’t be in there as long as they and the bank wanted them to be there,” Abernathy told CNSNews.com. “There’s no sun-setting of the Treasury investment.”
 
“There’s not a clear exit strategy here, for the government to back out of or remove itself from this kind of intervention,” he said.
 
The Treasury Department is not being forthcoming with any details clarifying its involvement. At a news conference Monday, Treasury Secretary Henry Paulson did not reveal how long the program would last, nor did he give an indication of how much of the $700 billion granted by Congress he planned to use.
 
Under the law, the Treasury secretary must submit a detailed report to Congress outlining all action he has taken under the authority granted him by the federal bailout bill. Paulson has 60 days to submit this report but has not indicated when he will do so.
 
Paulson must detail the extent of the program’s cost, all transactions made and whom they were made with, and what assets were purchased.
 
That 60-day window began Oct. 14, when Treasury began buying up troubled assets in nine major banks. Paulson will be required to make additional reports every 30 days until the law is no longer applicable – presumably when Treasury no longer holds private assets.
 
However, the Office of Financial Stability, the Treasury office established by the new law to oversee its implementation, is permanent, and Treasury is not required to relinquish private assets by a certain time, creating the possibility of extending the bailout much longer than previously thought.
 
Joe Witt, president of the Minnesota Banker’s Association, told CNSNews.com that even though the government seems to view the program as a short-term effort, the possibility of a never-ending bailout remained.
 
“I think that the government does not want to be in a long-term position of owning the stocks,” he said. “But who knows. This might end up being something that does work out so well that they want to keep it (and) not only in a tough economic time,” because, Witt suggested, “maybe there’s benefits in the future.”