The dwindling U.S. financial bailout fund will get a boost this week with repayments from some large banks and could see more resources freed up as once-ambitious programs to buy up toxic bank assets shrink.
This could present the U.S. Treasury with a welcome dilemma: what to do with potentially more than $100 billion in unallocated funds as financial market confidence strengthens.
Among the options are increased aid for the housing sector, programs to support mortgage insurers and municipal borrowers that have been clamoring for help, or perhaps just socking the money away for a future emergency.
Whatever they do should not discourage the return of private investors from investing in banks, said Wayne Abernathy, executive director for financial institutions policy at the American Bankers Association trade group.
We're at the fortunate point where we're asking ourselves the question, 'Do we really need these programs any more?'
This week, the Treasury's dwindling $700 billion Troubled Asset Relief Program (TARP) could see up to $66.7 billion returned from nine banks that have met at least the main requirements governing repayment.
And part of the $100 billion that Treasury had pledged from the fund to support purchases of troubled mortgage loans and securities from financial institutions could also be freed up as the Treasury's planned public-private program (PPIP) to cleanse bank balance sheets is scaled back.
Many banks have shown themselves able to tap equity markets for capital, easing the pressure to unload bad assets to make themselves more attractive for investors.
I do think the importance of the toxic asset program has been reduced, said Douglas Elliott, a fellow at the Brookings Institution in Washington. You can solve a lot of toxic asset problems by having enough capital at the banks. This has made people more comfortable with the level of potential losses.
U.S. Treasury Secretary Tim Geithner admitted last week that banks' interest in the plan was dwindling, and the Federal Deposit Insurance Corp said it would postpone a pilot sale of whole loans and re-examine the program.
After doling out an addition $30 billion for General Motors Corp (GM.N), the bailout fund has only about $54 billion unallocated, assuming the toxic asset program and the program that provide capital for banks are fully funded.
The $66.7 billion could be returned from the nine prime candidate repayment banks because they have raised equity capital, issued debt without a government guarantee, and have resolved any capital deficiencies identified by regulators.
Municipal borrowers have been the most vocal group seeking Treasury assistance, and have proposed rescue money be used to provide bond guarantees that banks and weakened insurers have been unwilling to provide.
Geithner has resisted this idea, but U.S. Representative Barney Frank has proposed legislation that would authorize the Treasury to provide reinsurance for bonds and direct the Federal Reserve to provide liquidity facilities to support municipal bond issuance.
However, the bill from Frank, the Massachusetts Democrat who heads the House of Representatives Financial Services Committee, will likely face stiff opposition from Republicans angered by bailouts and worried about increasing deficits.
Mortgage insurers, battered by rising foreclosures, also have sought to bolster their capital. Federal Housing Finance Agency chief James Lockhart has advocated a Treasury-funded program that would buffer them against potential losses.
The Treasury has been studying the issue for some time, but has not made any decisions on how to proceed.
The Obama administration's nominee to administer the bailout program, former Fannie Mae (FNM.N) chief executive Herbert Allison, signaled this week that he may prefer to simply hold on to the remaining cash in the fund, saying it was important to leave some headroom to deal with emergencies.
But he also emphasized the importance of resolving the housing crisis at the heart of the nation's economic woes and noted that Treasury needed to be flexible.
I interpret these signs of flexibility as a positive, said one mortgage insurance industry lobbyist.
(Additional reporting by Patrick Rucker)