ECONOMY: Tough decision on TARP

Geithner’s decision whether to extend the $700 billion Wall Street bailout before the end of the year pits politics versus prudence.

Prudence dictates an extension. Politically, the smart move is to allow the TARP to terminate and pivot to deficit reduction, according to several industry sources.

“Extending TARP makes sense in terms of the economy,” said Scott Talbott of the Financial Services Roundtable, “but it would be extremely unpopular politically.”

An extension would run through next October.

While Wall Street banks are handing out bonuses and markets are rising, there are worries that a new bubble, particularly in financial stocks, is now forming, in large part because of the government intervention.

“I think they are in a bit of a bind,” said one financial lobbyist.

Extending the TARP would give Treasury a cushion of approximately $210 billion in unspent TARP funds, plus tens of billions more that are expected to be paid back over the next 12 months.

Pressure is building to do new things with TARP, given the 10.2 percent unemployment figure and a lack of lending by banks.

“We need a rainy day fund in case it rains,” said one lobbyist who supports an extension.

Yet few pieces of legislation have been less popular, and a request for an extension would not be seen favorably on Capitol Hill, two financial industry sources said.

The AFL-CIO has not taken a position on the issue. Neither have associations representing small and large banks, including the American Bankers Association.

Paul Merski, chief economist for the Independent Community Bankers of America, said restrictions and rules associated with the TARP funds, including compensation limits, make the program unattractive.

“There are plenty of banks that would like to shore up capital, but TARP isn’t the way to do it,” he said.

Others believe that behind the scenes, banks would be happy to see the program extended, though they are loath to say so publicly. Doing so would immediately lead to calls for the program to end, one lobbyist noted.