Treasury Needs Unprecedented Financing
Bloomberg
By Rebecca Christie and Robert Schmidt
October 28, 2008

Oct. 28 (Bloomberg) -- The U.S. Treasury faces historic financing demands from a weakening economy and the added costs of a $700 billion Wall Street rescue program, the department's top domestic finance official said today.

"This year's financing needs will be unprecedented," said Anthony Ryan, the Treasury's acting undersecretary for domestic finance, at a Securities Industry and Financial Markets Association conference in New York, where he was a last-minute substitute for Treasury Secretary Henry Paulson.

Ryan's borrowing outlook comes after Treasury officials spent much of the past month publicly praising the rescue plan's virtues. The Treasury needs to sell debt to raise money for the new initiatives and also cope with a weaker economy, two factors analysts say may push the country's budget deficit to more than $1 trillion for the current fiscal year.

As part of the rescue effort, the Treasury aims to boost the economy by pushing $250 billion in new capital to U.S. banks. Half of that money has been set aside for large banks, which hold about half of all U.S. deposits, in hopes of stimulating more lending to businesses and consumers. The rest will go to regional banks and smaller institutions.

`Support the System'

"What we're trying to do is get banks to do what they are supposed to do, which is support the system that we have in America," White House spokeswoman Dana Perino said at a news briefing today. "Banks exist to lend money, that's how they make money."

Ryan said the Treasury will begin distributing $125 billion in capital injections to nine big banks "starting today." He reiterated that the Treasury's equity purchase program is aimed at healthy banks and has safeguards to protect taxpayer interests.

Wayne Abernathy, an executive vice president for the American Bankers Association in Washington, said his group met today with Treasury officials to discuss plans for making some of the aid available to the more than 6,600 financial institutions that aren't publicly traded.

The Treasury told the association that private banks wouldn't be held to the same Nov. 14 application deadline in effect for public companies, Abernathy said. The message from the agency was that "other banks shouldn't feel that time is running out," he said.

Effective Guarantee

Ryan also said the U.S. government now "effectively guarantees" debt issued by mortgage companies Fannie Mae and Freddie Mac, which were placed into conservatorship on Sept. 7. The preferred stock agreement included in the federal takeover means the U.S. now backs "both existing and to be issued" debt from the two companies.

"The U.S. government stands behind these enterprises, their debt and the mortgage-backed securities they guarantee," Ryan said. The agencies have almost $6 trillion in outstanding debt and mortgage securities.

Yields above Treasuries on Fannie Mae and Freddie Mac's debt and mortgage securities were little changed after the speech. The spread on Fannie's five-year debt fell less than 0.01 percentage point to 1.52 percentage points at 5 p.m. in New York, according to data compiled by Bloomberg.

Markets Under Strain

Ryan said U.S. equity and credit markets remain under "considerable strain" and face ongoing challenges. Still, Federal Reserve efforts to backstop commercial paper are "helping" to stabilize markets, he said.

To raise the necessary funding for the bailout and other programs, the Treasury is looking at selling more long-term debt and possibly bringing back three-year note sales at the Nov. 5 refunding, Ryan said. The Treasury also is raising money to address "many different policy objectives" and reduce bond market disruptions and will try to keep its borrowing patterns as regular as possible, he said.

`Predictable' Borrowing

"We firmly believe that investors value greatly and pay a premium for Treasury's predictable actions," Ryan said. "To the very best of our ability, we intend to stay the course."

Ryan said the Bush administration's July projection of a $482 billion deficit doesn't include new programs launched to attack the credit crisis. The bank rescue program, a separate mortgage-backed securities program, the Fannie-Freddie takeover and a student loan program all need funding, Ryan said. Also, the Treasury is borrowing money on behalf of the Federal Reserve and the Federal Deposit Insurance Corp., he said.

"The potential for deterioration in economic conditions given the contraction in credit also may affect budget conditions this year," Ryan said.

Analysts say the 2009 budget deficit could be more than double the White House projections. In fiscal year 2008, which ended Sept. 30, the deficit was a record $455 billion.

$1.95 Trillion

"The budget deficit for fiscal year 2009 might reach $1 trillion if Congress passes another stimulus package this winter," said Lou Crandall, chief economist of Wrightson ICAP, in a research note. "And that's just the beginning of the bad news -- financing needs arising from off-budget items might be nearly as large as the on-budget deficit."

Crandall estimates 2009's total borrowing needs at $1.95 trillion. He says Treasury could raise this money with an "aggressive but sustainable" increase in regular borrowing, accompanied by one-time auctions as needed.

In response to a question after the speech, Ryan declined to comment on the dollar, which today rose to an 18-month high against the euro. The U.S. currency's gains could hurt exports, which has been one of the few bright spots of the weakening economy.

"We don't have too many rules at the Treasury department, but one of the important rules is that only one person speaks on the dollar at the Treasury and he unfortunately couldn't join you here today," Ryan said.

To contact the reporter on this story: Rebecca Christie in Washington at Rchristie4@bloomberg.net; Robert Schmidt in Washington at rschmidt5@bloomberg.net;
Last Updated: October 28, 2008 18:51 EDT

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