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December 30, 2009 > Admin. plans $30B in bailout aid for small firms

Admin. plans $30B in bailout aid for small firms

By Martin Crutsinger and Daniel Wagner

WASHINGTON (AP), Dec 18 - The Obama administration is setting aside $30 billion from the financial bailout fund for a range of initiatives designed to encourage lending to small businesses to aid the economic recovery.

With the financial system stabilized, the administration will focus most of its resources from the $700 billion fund on programs to revive the job market and keep people in their homes, according to an internal document obtained by The Associated Press.

The document spells out how the Treasury Department plans to spend money from the fund before it expires in October 2010. It says $40 billion would go to new and existing programs to boost consumer and business lending.

Of that amount, $30 billion would back lending to small companies, according to a Treasury official who spoke Friday on condition of anonymity because no final decisions on the program have been made. An additional $21 billion would finish funding the administration's troubled mortgage relief program.

Only $6 billion will go directly to the banking system to shore up banks' balance sheets.

The accounting shows how fast and effective the bank bailout programs have been, even as efforts to aid other parts of the economy have languished. It underscores a criticism of the government's rescue effort: that it focused too much time and money on Wall Street while many Americans faced joblessness, tight credit and foreclosures.

The TARP program has been attacked as a bailout for Wall Street, allowing big banks to reap huge profits and lavish executives with bonuses. Banks have scrambled to repay their money so they can avoid government limits in areas such as executive pay.

President Barack Obama said in October that the administration would expand the effort to boost lending to small businesses. But officials have had trouble finalizing the details. The program has yet to be designed.

A range of options are being weighed, and key members of Congress are being consulted, said another Treasury official, who also spoke on condition of anonymity. He said final decisions aren't expected until next year.

The foreclosure and credit programs that will be funded in 2010 also started slowly and haven't reached as many people as the administration hoped.

The $50 billion program to help homeowners facing foreclosure was designed to provide incentives for lenders to lower borrowers' payments. But the Treasury document said only $1 billion has been spent on such mortgage modifications since the program launched in March.

Of the 760,000 people who signed up for the program since it began, just over 31,000 have received permanent loan modifications. That's far from the administration's goal of helping up to 4 million borrowers.

The administration has tried pleading with banks to modify more loans. Even if the applications for loan modifications were processed more quickly, the program wouldn't help some of the highest-risk homeowners: The unemployed and people who owe far more than their homes are worth.

The program to boost consumer lending lets investors borrow Federal Reserve money to buy securities backed by consumer and small business loans and commercial mortgages. The loans are guaranteed with $20 billion from the financial bailout fund. That would be expanded to $30 billion.

Under its first phase, $200 billion was available, but only $44.5 billion was requested.

But the largest bailout programs, designed to stabilize the banks, have performed so well that most are no longer needed. The internal document cited data to support the administration's argument that the bailout fund has bolstered banks' capital reserves and defused the nation's worst financial crisis since the Great Depression.

The Treasury document projected that in all, an additional $68 billion would be committed before the $700 billion bailout fund, known as the Troubled Asset Relief Program, expires on Oct. 3, 2010. It estimates that the commitments from TARP will total $550 billion.

The program was authorized by Congress in October 2008 at the height of the crisis as the government scrambled to shore up the banking system. Over the past year, the system has stabilized with the help of billions injected into banks to bolster their capital - the reserves they have to protect against loan losses.

But critics charge that TARP has failed to get banks to lend more to consumers and small businesses.

The Treasury document showed that only $3 billion would be committed to provide banks with capital in the coming year, through the Capital Purchase Program. That compares with $205 billion spent on what became the biggest part of TARP. Officials said this figure will cover 10 to 15 banks that have been approved for TARP support but haven't yet received the money.

Another $3 billion will be devoted to the Public-Private Investment Program, which already has received $27 billion in TARP commitments. This is a program between Treasury and private investment groups who are buying banks' toxic assets to encourage them to lend more.

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AP Real Estate Writer Alan Zibel contributed to this report.

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