The Treasury Department announced today that it would extend the Troubled Asset Relief Program to Oct. 3, 2010.

In a letter to lawmakers, Treasury Secretary Tim Geithner cited improvements in the economy but said TARP must be extended due to remaining challenges for homeowners and small businesses.

"This extension is necessary to assist American families and stabilize financial markets because it will, among other things, enable us to continue to implement programs that address housing markets and the needs of small businesses, and to maintain the capacity to respond to unforeseen threats," Geithner wrote.

The secretary said he would limit the use of the program to a few areas: mitigating foreclosures, helping small businesses, providing capital to community banks, and increasing the Term Asset Backed Securities Loan Facility.

Geithner said he would only use TARP for other purposes if they were necessary to stabilize the financial industry. He said he would first consult with the president and the chairman of the Federal Reserve Board as well as submit written notification to Congress before taking other actions. He warned emergency actions might still be necessary.

"As we wind down many of the government programs launched initially to address the crisis, it is imperative that we maintain this capacity to respond if financial conditions worsen and threaten our economy," he wrote. "This capacity will bolster confidence and improve financial stability, thereby decreasing the probability that it will need to be used."

Geithner reiterated that the program is expected to cost less than originally estimated, and said he did not think Treasury would use all $700 billion initially allocated to it.

"While we are extending the $700 billion program, we do not expect to deploy more than $550 billion," he said. "We also expect up to $175 billion in repayments by the end of next year, and substantial additional repayments thereafter. The combination of the reduced scale of Tarp commitments and substantial repayments should allow us to commit significant resources to pay down the federal debt over time and slow its growth rate."

This story was reprinted with permission from American Banker.

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