With the funds available under the Troubled Asset Relief Program steadily dwindling down into the second $350 billion leg of the program, the government may be considering a new “bank bailout” plan altogether. Unnamed sources told the Wall Street Journal a revamped financial bailout could top as much as $2 trillion in additional spending to restore the banking system’s vitality and get credit flowing. The funds would come in excess of the $700 billion already granted through the TARP, as well as the $800 billion-plus economic stimulus package circulating through Congress; the House has passed its version of the bailout legislation, designed to stimulate spending and economic growth through a combination of tax cuts and government spending programs, all constructed with the flailing financial market in mind. But critics argue some of the spending programs present timely issues and may not have a significant effect for some months — or years — while tax breaks may not have much effect on encouraging spending or thawing out frozen credit. One  of the solutions circulating in discussions within and without the administration involves setting up a “bad bank” to buy bad loans and distressed securities off the sheets of financial institutions. The purchasing vehicle may receive some initial funding from the TARP, as well as an additional spending power from $1 to $2 trillion, which sources told the Journal can be raised by selling government-backed debt or borrowing funds from the Federal Reserve, which is already in the process of buying up to $500 billion in agency mortgage-backed securities. Fed chairman Ben Bernanke this week wrote a letter suggesting the Fed may even go so far as to modify the loans it owns within those securities. Treasury Department secretary Tim Geithner on Wednesday announced the Treasury was in discussions on a plan aimed to “repair the financial system,” but did not confirm rumors about either a “bad bank” or nationalization of some major banks. “We have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system,” he said. House speaker Nancy Pelosi on Sunday, however, hinted at nationalization — or at least semi-nationalizaiton — of the largest banks, although she denied any possible “total ownership” strategy, the New York Times reported Sunday. “Well, whatever you want to call it,” Pelosi said, according to the Times. “If we are strengthening [the banks], then the American people should get some of the upside of that strengthening. Some people call that nationalization.” Write to Diana Golobay at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

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