Obama team, Rep. Frank eye bailout fund overhaul

By Caren Bohan and David Lawder

WASHINGTON (Reuters) - President-elect Barack Obama and a key Democratic lawmaker revealed plans on Friday to overhaul the government's $700 billion financial rescue fund as a way to aid struggling homeowners and speed the flow of credit.

An Obama transition official on Friday confirmed that the new administration planned a broader approach for the second $350 billion of the U.S. Treasury's Troubled Asset Relief Program. Some money would be aimed stemming record foreclosures and helping cash-strapped local governments, which have been forced to cut staff and services.

U.S. Rep. Barney Frank, chairman of the House Financial Services Committee, said he was planning to require money be devoted to housing. Aides said Frank's legislation, which would also tighten restrictions on the use of TARP funds by recipients, would demand about $40 billion for foreclosure relief.

The efforts underscore growing dissatisfaction in Washington over the handling of the bailout fund by departing Treasury Secretary Henry Paulson.

Lawmakers have complained that his approach to devote the first half of the TARP money largely to recapitalize banks as a way to lessen the worst credit crisis in a generation has failed to slow soaring foreclosures.

"There's just no money that's gone in that direction. This one's not even arguable," Elizabeth Warren, the chairman of a TARP congressional oversight panel, told ABC News. "The TARP funds themselves have not been used in this way despite congressional statutes requiring them to do so."

A report from the panel on Friday also sharply criticized the Treasury's lack of oversight, saying there were "significant gaps in Treasury's monitoring of the use of taxpayer money," including failure to ask financial institutions to account for what they have done the funds.

The Obama transition official, who spoke on condition of anonymity, said the TARP overhaul, spearheaded by Treasury Secretary nominee Timothy Geithner and top Obama economic adviser Larry Summers, would seek to expand loans to municipalities, small business and consumers.

"These are powerfully important initiatives. I am very pleased that the incoming administration is focused on these issues," said Warren, a Harvard University law professor.

Defending his decisions on TARP, Paulson told Bloomberg Television he was "absolutely convinced they are the right things." He said the fund needed to keep adding capital to the banking system to foster conditions for an economic recovery.

But he has left decisions on how to spend the second $350 billion in the TARP fund to Obama, who takes office on January 20. The Treasury must ask Congress for the money.

TOUGHER TARP TERMS

Frank's bill lays out some key conditions for the program.

These require the Treasury to develop foreclosure relief plans for owner-occupied homes by March 15 and start committing TARP funds to it by April 1. The plans can include government guarantees for modified loans, paying down second liens and outright loan purchases to bring down payments.

The measure also would toughen executive compensation rules and make some of them retroactive for banks that have already received funds.