WASHINGTON — Treasury Secretary Tim Geithner, in office only since Jan. 26, will face a hostile Congress when he testifies Tuesday on the Obama administration's plans for improving the Troubled Asset Relief Program.
Lawmakers from both parties in the Senate Banking Committee expressed growing frustration Thursday with Tarp, warning that public anger makes it unlikely the Treasury will get any more than the $700 billion already authorized.
This puts the Obama administration in a tight corner. Administration officials, including Mr. Geithner, have pledged a "comprehensive" strategy that will resolve the industry's problems.
Since its inception in October, Tarp has been manipulated to fit the crisis of the day. In addition to injecting cash into healthy banks as a way to spur lending, it has been drained to prop up systemically important financial companies, including Citigroup Inc. and Bank of America Corp.
The markets have hardly been encouraged. Shares of both companies have sunk this year and are trading at a fraction of book value.
Unlike in the past, lawmakers were not careful about fueling concern.
Sen. Bob Corker, R-Tenn., called the two companies "dead men walking" and accused regulators of underplaying the problem.
"These banks know they … are going to have tremendous losses," he said. "What do we do at this time — lose the top 50 banks immediately or what?"
Sen. Richard Shelby, R-Ala., piled on, quoting former Fed chairman and the chairman of the president's economic recovery advisory board Paul Volcker as saying, "Some banks are too big to exist."
Senate Banking Committee Chairman Chris Dodd was asked Thursday whether B of A was in danger of being nationalized. He assured reporters that he did not support such a move, but the fact that the question was even asked raises the issue.
"This is all about confidence," a senior regulator said Thursday. "Something needs to be done to stop this avalanche of concern."
Six Bank of America insiders, including chairman and chief executive officer Kenneth D. Lewis, are trying. They rallied around the company for a second time in the past month, buying 370,000 shares Wednesday for $956,000; Mr. Lewis himself bought 200,000, according to regulatory filings Thursday. Last month, Mr. Lewis paid about $1.2 million for the same number of shares.
Sen. Dodd said the public — and fellow lawmakers — need to give the new administration time to make Tarp work but said expectations were already too high.
"I worry that we are overselling this whole program in a way that somehow, miraculously … we are all of sudden going to be able to turn things around. We are not. We have a long way to go," he said.
Several lawmakers said it was becoming clear that the Obama administration is likely to need more money to carry out its plans to stabilize the system — but said creating political support for the funding would be tough.
"Let me be clear there will be no additional funding for this program without airtight assurances that it will be better managed," said Sen. Evan Bayh, D-Ind. "That is the bottom line."
Mr. Geithner is scheduled to give a speech Monday outlining his plans for Tarp and is to appear before the Senate banking panel a day later. But even some lawmakers who supported the original Tarp allotment have had second thoughts; they pointed to a rise in constituent calls demanding that Congress stop bailing out banks.
"If we do not have … transparency … our constituents will not permit us to dole out the money," said Sen. Robert Bennett, R-Utah, who voted for the bailout. "The political support for doling out the money will not be there."
He said he supported Tarp last fall because he was assured the $700 billion would at least make a dent in the problem.
"It is now very clear that has not happened, and I have a very tough time explaining to my constituents why that has not happened when I had every assurance that it would," Sen. Bennett said.
During the hearing, lawmakers cited concerns over a Congressional Budget Office report released this week that detailed new weaknesses in the financial bailout.
The CBO said that the Treasury had overpaid by $64 billion for stakes in major financial institutions. Elizabeth Warren, the Harvard law professor who leads a congressionally appointed panel overseeing Tarp, said the situation is even worse. The government spent $254 billion on stakes in banks that were only worth $176 billion, she estimated — a shortfall of nearly $80 billion. Lawmakers said the situation was unacceptable and showed that the Treasury did not know what it was doing.
"Valuation of these assets is going to be absolutely critical," said Sen. Jack Reed, D-R.I.
More damaging information may be on the way.
Neil Barofsky, the Tarp special inspector general, said he is going to do four audits, including one focusing on why and how B of A was rescued. The Charlotte company has gotten Tarp capital injections of $45 billion and asset guarantees of $118 billion.
The special inspector general's three other audits will focus on outside influences related to Tarp, executive compensation practices at companies that got government aid, and how companies have used Tarp funds.
Several lawmakers expressed concern about the B of A backstop, arguing that Tarp capital was meant only to help healthy banks.
"That's certainly not a healthy financial institution," said Sen. Jim Bunning, referring to B of A.
Sen. Shelby agreed, saying that the "Treasury injected capital into purportedly healthy banks under the Capital Purchase Program. Less than a month later, additional assistance was announced for one of the same banks."
"Citigroup, one of the nine so-called healthy banks, … needed a second installment of Tarp funds one month later … . Similarly, Bank of America, another recipient and so-called healthy bank … was back for another $20 billion last month," he said.
Sen. Shelby said he wants a study of why the Treasury called these institutions and others that received capital in October "healthy." "Nobody believes they are healthy," he said.
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Corrected February 9, 2009 at 8:29PM: An earlier version of this story gave an incorrect source for a statement that the Treasury Department had overpaid for bank stakes and warrants. It came from the Congressional Budget Office. The story also overstated the amount by which the CBO says the Treasury overpaid. It was $64 billion.