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Bailout remains key to saving US banks

WASHINGTON, Jan 27 – Despite criticism of how the bailout of ailing US banks has been managed, officials and economists say more money needs to be poured into the financial industry at the heart of the economy.

The US Congress agreed earlier this month to release the second half of a 700-billion-dollar Treasury financial bailout fund as banks continue to sink under losses despite injection of fresh capital and hundreds of billions of dollars in loans.

Some lawmakers and public watchdog groups have accused the banks of siphoning off the funds under the Treasury\’s Troubled Asset Relief Program (TARP) to use for executive bonuses or to plug their own losses instead of lending it out to spur economic activity.

But experts say authorities have little or no choice but to continue pumping money with greater accountability to save the ailing institutions from outright collapse.

President Barack Obama\’s administration is preparing a comprehensive strategy to rescue the beleaguered banking industry that could see funding increase beyond the second bailout tranche of 350 billion dollars.

A radical prospect of nationalizing some banks has not been ruled out.

"Without hundreds of billions of dollars in additional funding, policymakers\’ options for dealing with troubled assets and recapitalizing financial institutions will be significantly constrained," said Andrew Tilton of Goldman Sachs.

Even though equity valuations of institutions such as Bank of America and Citigroup have plunged by about 90 percent despite receiving bailouts, Tilton said rapid injection of funds "probably did help to stave off total financial collapse."

"Without that first package, we might well have had a financial collapse in this country" and the Dow Jones Industrial Average index "today would be at 4,000," said Democratic senator Kent Conrad, who heads a key budget committee. The US stock market benchmark index closed at 8,116.03 on Monday.

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Douglas Elliott, an expert at the Washington-based Brookings Institution, focused on a US Congressional Budget Office (CBO) report released last week that estimated that just one quarter of financial bailout funds already allocated would be actual losses.

The CBO said that only 64 billion dollars of the 247 billion dollars committed at the time of its analysis would be true costs to the taxpayers.

The rest would essentially be a loan from the public that would be repaid at a market rate of interest.

"Unfortunately, the political discourse and headlines have focused on the maximum possible loss — that famous 700 billion dollar figure — rather than the expected cost or even a conservative \’probable worst case\’ number," said Elliott, a former investment banker.

"Despite today\’s grim economic circumstances, it would be virtually impossible to lose that whole amount."

Reports indicated that some banks that received bailout funds misused the money by paying bonuses to top executives, leasing or buying private jets, or to cover their investment losses.

"The write offs have been so intense that these funds (the first tranche of TARP funds) merely have prevented lending capacity from falling further," said Morgan Keegan & Company economist Donald Ratajczak. "That is why banks are not lending."

Lending at many of the largest US banks fell in recent months even after they received injections of taxpayer capital, according to a Wall Street Journal analysis of their quarterly results.

Ten of the 13 big TARP beneficiaries saw their outstanding loan balances decline by a total of about 46 billion dollars, or 1.4 percent, between the third and fourth quarters of 2008, the newspaper said.

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How the Obama administration deploys future bailout funds is key to any economic recovery from a deepening recession, experts said.

"We also need to see investor risk-taking come back to the financial market, but this will depend importantly on how the Treasury deploys the remaining 350 billion dollars in TARP funding," economists at Deutsche Bank wrote in a report.

"At the moment, investors are afraid to put capital in the banking sector for fear of equity dilution," they said.

"As long as the financial system is broken … the economy is not going to improve and positive second half GDP growth could prove illusory."

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