Paulson says Obama will decide on rescue spending

By Patrick Rucker and David Lawder

WASHINGTON (Reuters) - President-elect Barack Obama will decide how to spend the remaining half of a $700 billion economic rescue package, a top Bush administration official said on Wednesday, while a key Democratic lawmaker outlined his vision of how new rescue funds should be spent.

"The only decision-maker as to how that money is going to be used ... is going to be the Obama administration," Treasury Secretary Henry Paulson said in a speech that will be one of his last before departing office later this month.

While Paulson has been credited for his tireless efforts to stem the worst financial crisis since the Great Depression, Democrats have faulted him for doling out money to banks while refusing to give direct aid to troubled homeowners.

So far, the Treasury has access to only half of the $700 billion fund Congress approved in October and Democrats on Capitol Hill are preparing legislation that would set conditions on the release of the remaining share.

In a memo to his congressional colleagues obtained by Reuters, one of the top rule-writers for the finance industry outlined his plan to use federal dollars to save homeowners from foreclosure.

Barney Frank, chairman of the House of Representatives Financial Services Committee said that he expected Obama would be an ally in writing new financial rescue terms.

"I do personally have confidence that President Obama (will) spend the money more wisely and in line with congressional wishes than has previously been the case," the Massachusetts Democrat wrote.

Frank said he plans to breathe life into a foreclosure-prevention plan conceived by Federal Deposit Insurance Corp Chairman Sheila Bair and that he might also jump-start a separate plan conceived by Paulson's team that would fund below-market-rate home loans.

Bank executives could see their bonus pay curtailed and cities issuing municipal debt could also get aid, Frank wrote in the six-point outline.

RESCUE FUNDS SCATTER

The $700 billion fund is the centerpiece of a huge government effort to moderate a fast-moving economic crisis that is darkening both the Bush administration's final days and the start of the Obama administration on January 20.

The program has so far committed $354 billion to bailing out troubled large banks, automakers and insurance group American International Group Inc, although much of the money has yet to be disbursed.

The Treasury Department -- whether it is headed by Paulson or his successor -- must formally inform the Congress when it plans to begin drawing on the final $350 billion portion of the fund, allowing Congress an opportunity to block access.

Paulson said he would only request the final installment if Obama asked him to do so.

A spokesman for Obama said the president-elect was reviewing his options. "The president-elect has made it clear that he'll do what's necessary to stabilize and restore confidence in the financial system and is reviewing a number of options," said spokesman Nick Shapiro.