With the $350 billion injected into US banks from the $700-billion Troubled Asset Relief Program having failed to bring the banks back to their feet, the new US President now wants to inject another $2 trillion to make the bank start lending again to help get the US economy pull back from the credit squeeze.
The Wall Street Journal, citing people familiar with the matter, reported that the Obama administration is discussing ways to overhaul the existing US financial bailout as it has not restored confidence in either the banks to lend or investors to put their capital once again in the banks.
Obama had made it clear in his inaugural speech that he would do whatever it takes to stabilise the financial system to get credit flowing again to families and businesses.
The report said the new administration may announce the $2 trillion bank bailout plan plans in the next couple of days after finalising on the proposal and fine tuning the details.
The Obama administration feels that if a massive dose of $2 trillion is injected into the banks, may alleviate their problems and enable them to start lending once again, which they are unable to do as most of them are still saddled with distressed securities and bad loans.
According to The Wall Street Journal, a Treasury spokeswoman said that the administration has many options for a comprehensive plan but no final decision has yet been made.
One of the options before the new administration for raising between $1 trillion and $2 trillion are to sell some of the debt backed by the US government or borrow from the Federal Reserve.
With the US Treasury having already loaned nearly $300 billion from the first $350 billion TARP to banks and more recently the Detroit automakers as well as to homeowners facing foreclosure, the amount left is the remaining $350 billion of the $700 billion created by the White House and US Congress last October. Therefore, the Obama administration now wants the remaining part of the TARP funds to be added to the $1 trillion or $2 trillion to buy the bad assets from the banks.
US policymakers have been debating the idea of creating a so-called bad bank, with former Clinton-era economic advisor and now a key economic advisor to President Barack Obama, Laura Tyson, said at the annual World Economic Forum in Davos, Switzerland, ''The natural next step is, which is real simple, you take the bad assets out, the balance sheets are hit really hard; you recapitalise banks with different rules, and they go out again and lend.''
Tyson is a former chair of the US president's Council of Economic Advisers during the Clinton administration and is currently a professor at the Haas School of Business at the University of California at Berkeley, apart from being in with the Obama adminitration.
The administration, according to the paper, is also looking at various options of injecting money into the banks as it does not want to end up appearing to be nationalising banks and running them.
The government is considering buying convertible bonds, where it would have the choice of getting interest in the short term and the option to obtain common equity later.