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Paulson Rolling Out Rest of TARP?

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Treasury, Congress spar over remaining $350 billion.

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$350 billion sure didn't last very long.

Just 60 days ago, Congress allocated $700 billion in TARP money to rescue the financial system, half of which was available immediately. Now, according to the Wall Steet Journal, Treasury Secretary Hank Paulson may ready to ask for the second half.

If he does, he's likely to face stiff opposition on Capitol Hill. A recent Government Accountability Office report rebuked the Treasury for insufficient oversight and staffing to ensure the money it has already poured into banks like Goldman Sachs (GS), Bank of America (BAC), JP Morgan (JPM) and Morgan Stanley (MS) is achieving the intended goals.

Meanwhile, Congress is eyeing the remaining bailout funds for other uses. First, and most immediately, lawmakers are likely to spring for an aid package for floundering automakers General Motors (GM), Ford (F) and Chrysler. The Big 3 said yesterday it would take $34 billion to save them from collapse.

Lawmakers are also pushing for more help for homeowners. The debate over loan modifications and how best to prevent foreclosures has intensified in recent weeks, as banks, loan servicers, investors, academics and regulators squabble over the best solution.

FDIC Chairman Sheila Bair has advanced an aggressive plan for the government to share potential losses with banks and streamline the modification process. Critics, however, argue Bair's program -- currently being stress-tested at failed California thrift IndyMac -- is falling short of lofty expectations and that claims of it's successes are overblown.

Compounding the complexity of deploying the bailout money is the transition to a new presidential administration. The Journal reports the Obama team is in close communication with the Bush administration, but is shying away from taking the lead in negotiations.

It's all but certain the $700 billion Congress allocated to prop up the financial system will simply be round one of a widescale capital infusion into American banks. Eroding economic conditions, falling consumer confidence and the ongoing credit contraction will continue to result in heavy losses for financial institutions across the country.

A broad-based stimulus package due to be announced on inauguration day is likely to include more help for troubled banks.

Still, short of outright nationalization, Washington is powerless to force banks to start lending again. Economic recoveries are typically spurred by an expansion of credit, making it cheaper for firms of all types to borrow, spend and start growing again. This time, however, banks won't part with their precious dollars for fear loans won't be repaid and losses will continue to spiral.

As well they should: Defaults across loan categories are rising as the economic malaise spreads up the credit spectrum. American consumers, strapped for cash and credit alike, are cutting back, reining in the rampant spending the propped up the domestic economy.

The road to recovery will be long, and not without potholes and hairpin turns, but it is a road nonetheless. As Toddo often says, "In order to get through this, we have to go through this.
No positions in stocks mentioned.

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