Like the crew of a ship taking on water in the middle of a fierce storm, President-elect Barack Obama's financial advisers are facing a new threat that could derail or significantly impede their efforts to spark an economic recovery. The "too big to fail" financial institutions stabilized at a cost of hundreds of billions of dollars last fall are facing trouble again, and members of Congress are hesitant about funding possible future rescues.
Many lawmakers are angry, and they have a right to be - management of the first bailout has been sketchy and lacked accountability. But Democratic and Republican leaders are worried about banking giant Citigroup, which posted fourth-quarter losses averaging nearly $100 million a day, and significant losses at other leading financial institutions. Congress should put its doubts aside and provide the $350 billion that both Mr. Obama and President George W. Bush have requested this week - with conditions such as tight controls on how it is spent and a promise that at least $40 billion will be used for home foreclosure prevention efforts. Mr. Obama was clear about his need for the funds. "It would be irresponsible for me, with the first $350 billion already spent, to enter into the administration without any potential ammunition should there be some sort of emergency or weakening of the financial system," he said, and we agree.
Federal Reserve Board Chairman Ben S. Bernanke underlined the danger yesterday, saying he was concerned about the continuing lack of bank credit. He suggested more capital injections and loan guarantees may be needed.
Unfortunately, no one knows how many billions in public funds might be required to shore up financial markets. The deepening recession is eating into the value of home mortgages and other assets held by the banks, making private investors skittish. Analysts are forecasting that the U.S. banking industry will report its first quarterly loss since 1990. Lawrence Summers, the incoming director of Mr. Obama's National Economic Council, has promised congressional leaders that he will overhaul the bailout program, including more oversight and a sweeping new effort to prevent home foreclosures with a chunk of the money. Massachusetts Rep. Barney Frank, the leading Democrat on the banking mess, has drafted a bill that would require the same. Congress should pass the Frank bill and frame additional legislation that would require close regulatory control over "too big to fail" institutions.