Paulson says Obama will decide on rescue spending

By Patrick Rucker and David Lawder

WASHINGTON (Reuters) - The architect of the Bush administration's effort to stabilize the troubled U.S. financial system said on Wednesday President-elect Barack Obama will make the decisions on how to spend the remaining half of a $700 billion bank bailout program.

Treasury Secretary Henry Paulson, nevertheless, urged the incoming president to continue using the Troubled Asset Relief Program, or TARP, to inject capital into distressed banks.

House of Representatives Democratic Leader Steny Hoyer told reporters he does not expect a request from the White House this week for more TARP money while Democrats draft a bill to set conditions on release of further funding.

"My expectation is no request will come down this week. I hope that's the case," Hoyer said in a briefing.

The TARP 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.

Begun in October, the program has so far committed $354 billion to bailing out troubled large banks, automakers and insurance group American International Group Inc.

Paulson, who has led the plan's implementation, said the Treasury is still working on plans for future capital investments in banks using the TARP, and on "creative ways to leverage the TARP resource for consumers outside the banking system" in his final two weeks in office.

But these would be recommendations only, he said in answering questions after a speech on mortgage finance.

"The only decision-maker as to how that money is going to be used, how those funds are going to be used is going to be the Obama administration," Paulson said.

The Treasury Department -- whether it is headed by Paulson or his successor -- must formally request that Congress release the second $350 billion portion of the TARP.

House Democrats are drafting legislation to impose conditions on the release of the second half of the funding. Those conditions will include tighter limits on the pay of executives working for TARP-beneficiary companies, and more accountability by the companies on how they use the money.

House Democrats also want to require that money be spent on helping troubled homeowners -- an issue that they have said is being largely ignored by the Bush administration.

Paulson has said that he was duty-bound to help troubled borrowers avoid foreclosure as part of TARP, but Treasury never conceived a program to give homeowners direct aid.

"Barney Frank is working on legislation to require transparency and accountability of any TARP additional funding, and in addition to that, requirements that substantial sums be used for mortgage relief," Hoyer said, referring to the Democratic congressman from Massachusetts.

He said he hopes the House will pass Frank's bill before considering any request for more TARP funding.