Obama looks to revamp financial bailout

January 9, 2009 5:59:25 PM PST
Barack Obama's economic team is talking with the Bush administration about having Treasury Secretary Henry Paulson ask Congress within the next week for access to the $350 billion remaining in the financial bailout fund, officials on both sides said Friday. A request by Paulson would allow Obama to begin tapping the fund - the last half of a $700 billion rescue package authorized by Congress in October - promptly after his Jan. 20 inauguration.

Obama's transition team also has asked Neel Kashkari, the head of the rescue program at the Treasury Department, to stay on for "a couple of weeks" under the new Obama administration to ensure a smooth transition, an Obama official said.

Paulson has said for a number of weeks that he has been having talks with the Obama team on when a request should be presented to Congress seeking the second $350 billion. He has said that the decision on timing has been left up to the incoming administration.

"They're the decision-maker here," Paulson said in a response to a question after a speech Wednesday.

He said that for several weeks "we've been quite clear" with the Obama team that "if they would like us to notify Congress on their behalf" to trigger release of the second half of the bailout fund, "we're willing to work with them on it."

Eager to shift the course of the government's financial sector bailout fund, Obama and congressional Democrats want a more defined mission for the beleaguered $700 billion rescue program.

The House could act as early as next week on a new tack for the Troubled Asset Relief Program that would set tougher conditions on recipients of the money, including limits on executive pay, and require the Treasury Department to use some of the money to reduce mortgage foreclosures.

At the same time, Obama's selection for treasury secretary, Timothy Geithner, is broadening the program's goals, aiming to unfreeze credit for homeowners, consumers, small businesses and local governments.

Geithner and Obama's economic team are developing a "comprehensive set of investment principles" that would also embrace restrictions on how the money is spent, limits on executive compensation for fund recipients and a plan to address rising foreclosures, an Obama transition official said.

The changes come amid bipartisan criticism that the Bush administration's handling of the first $350 billion of the program has been unfocused, confusing and inconsistent. But the new approach also signals a significantly greater government intrusion into the workings of financial institutions than the Bush administration was willing to undertake.

The money so far has been used to support ailing companies such as insurance giant American International Group Inc. and automakers General Motors Corp. and Chrysler LLC. It also has pumped billions of dollars into banks in hopes of freeing up credit for loans. But critics have complained that the money has had few strings attached and has not been used effectively to address the nation's housing crisis.

Legislation introduced Friday by House Financial Services Committee Chairman Barney Frank, D-Mass., and changes under consideration by Obama's team would place compensation limits on executives of institutions that receive the money. Frank's bill would permit the Treasury to apply the pay restrictions retroactively and would even force such institutions to get rid of any private aircraft they may own or lease.

The bill also would require that the new Obama administration spend between $40 billion and $100 billion of the remaining $350 billion on foreclosure mitigation. Since Congress approved the rescue program in October, congressional Democrats and Obama have insisted that some of the money be used to help homeowners on the brink of foreclosure.

Frank said Friday he has been working closely with Obama transition officials on the legislation and said he trusts Obama officials to run the program effectively. But he added, "In this case we are Reaganites; we intend to trust but verify."

Under the terms of the legislation creating the fund, Congress has 15 days to reject any request for the remaining $350 billion.

As a result, Obama and Bush officials have been discussing the possibility of seeking access sooner rather than later.

"There have been discussions between the administration and the transition team on how to proceed, should the president-elect determine that he would like President Bush to notify Congress on his behalf of the intent to use the remaining $350 billion so that it will be available early in the new administration," White House spokeswoman Dana Perino said. "No final decisions have been made."

Geithner is expected to face a confirmation hearing before the Senate next Thursday and he can count on being quizzed vigorously on his TARP proposals.

Though the Obama team is not offering any specifics, the mere fact that it is setting goals for the money won support from the head of a congressional panel that is charged with overseeing how the money is being spent.

"These are powerfully important initiatives," said Harvard law professor Elizabeth Warren, head of the panel. "I'm very pleased that the incoming administration is focused on these issues."

The Congressional Oversight Panel released a report Friday detailing questions about how banks are spending taxpayer money, how the money will combat the rising tide of home foreclosures and Treasury's overall strategy for the rescue. In instance after instance, the panel said, the Treasury Department did not offer adequate responses.


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