Will Second Half Of Bailout Money Fix The Economy?
RENEE MONTAGNE, host:
Last night, the government moved to shore up Bank of America with $20 billion more from the bailout fund. David Wessel of the Wall Street Journal joins us now. David, good morning.
Mr. DAVID WESSEL (Economic Editor, Wall Street Journal): Good morning.
MONTAGNE: Now, I have some questions for you on the Troubled Assets Relief Program, but first, just about this news on Bank of America getting this government money, why?
Mr. WESSEL: Well, as you remember in the fall, Bank of America agreed to buy Merrill Lynch during that terrible week in September when Wall Street redwood seemed to be falling every day. And they did it without government assistance. Apparently, in December, Bank of America came to Treasury Secretary Paulson and Fed Chairman Bernanke and said, look, these Merrill Lynch books are in much worse shape than we thought, and I'm not sure I'm going to be able to close the deal. They begged him to close the deal for the good of the system, and now they're giving him his reward. The government will invest $20 billion more in Bank of America, that's through the TARP, and the Fed will say to the - is saying to Bank of America, put $118 billion worth of real estate loans, mortgages and stuff like that in a basket, and if it turns out that they're worth a lot less, you take part and we'll take part. And Bank of America's losses on that are limited to about $20 billion. It's just like what they did for Citigroup a few weeks ago.
MONTAGNE: OK. So, the government will now be spending more - or the remainder of that bailout money. But let's talk about, is it working, generally? Some say that first 350 billion has not done what it was supposed to do. Is there a reason to believe this second chunk will?
Mr. WESSEL: A lot of it depends on what you think it was supposed to do. So, one, you have to say that it might have been worse if the government didn't have this money and this power. We might have seen a big bank failure with all the panic that that ensued. Secondly, the whole point here was to build up the banking system's capital so they wouldn't shrink lending, and that may have succeeded, but it hasn't managed to stimulate a lot of lending and get us out of the hole. Part of the problem of that is the problem is just much bigger than was conceived either in September, and part of it was in the execution of the TARP and in the conditions they put on it. So, you see that the Obama administration is trying to use the fundamental idea of the TARP the same way the Bush administration did, but with some conditions and tweaks to make it work better.
MONTAGNE: But David, can the government force banks to lend more?
Mr. WESSEL: Well, it can certainly try. And Larry Summers, the president's economic advisor, laid out some new conditions yesterday, where they are going to make banks that are healthy, that don't have major capital shortfalls - if there's any of those left - show that they are lending more tomorrow than they are lending today. But at the moment, the government doesn't own the banks and control them. It's put a lot of money in, and it can only encourage, cajole, put pressure on them to lend. It's not running the banks. And the second thing is a lot of federal regulators don't want the banks to go out and make a lot more bad loans. And with the economy deteriorating so much, it's a very fine line between lending more that makes sense and lending more that doesn't make sense and creating problems down the road.
MONTAGNE: Now, getting that second 350 billion of bailout money is part of Mr. Obama's economic recovery plan. The other part is his stimulus package, more billions there. Where does that stand?
Mr. WESSEL: Well, it's moving along a little more slowly. There's a lot of disagreement about precisely what should be in it, although there seems to be very little disagreement that there should be a big stimulus package. Yesterday, the House Democrats put out their version: an 825 billion two-year plan that has about 550 billion in new spending and 275 billion in tax cuts. The Obama people think that spending more may have a more immediate stimulative effect on the economy, but when the Senate takes this up, they may want more tax breaks, especially if President-elect Obama has any hope of getting Republican votes for this thing. But this should be a little bit easier. It's - there are a lot of goodies to give out here, and the argument is about who gets them.
MONTAGNE: Well, you know, just briefly, what have we learned about the president-elect in the last few days?
Mr. WESSEL: Well, that's interesting. I mean, I think President-elect Obama had his first test with Congress, and he did a Lyndon Johnson. He twisted enough arms in the U.S. Senate yesterday to get them to vote for something that is very unpopular. And so, it suggests that, you know, the guy may have some skill at this thing, and it's going to give him a lot of momentum going into this fight over the stimulus, which is much more pleasant. It's about giving out goodies, rather than bailing out banks.
MONTAGNE: David, thanks very much.
Mr. WESSEL: A pleasure.
MONTAGNE: David Wessel is economics editor of the Wall Street Journal.
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