Political risk high for Wall Street as TARP unfolds

By Kevin Drawbaugh - Analysis

WASHINGTON (Reuters) - Congressional Democrats and the incoming Obama administration are uniting around strategies for saving the U.S. financial system, but a fog of political risk still hangs over Wall Street and the banks.

That cloud won't lift for a long time, policy analysts say, as Congress proceeds down a two-track effort to rescue the financial system and then to restructure it.

That process is expected to take many months, with the potential outcome hard to predict.

"The industry will face more political risk in the next six to 12 months than it has faced since the savings and loan debacle ended in the early 1990s," said Jaret Seiberg, financial services analyst at Stanford Group Co.

Some visibility emerged on Monday around the biggest of the government's many emergency rescue projects, the $700-billion Troubled Asset Relief Program, or TARP.

President-elect Barack Obama and House of Representatives Financial Services Committee Chairman Barney Frank signaled agreement on new conditions for spending the TARP's second $350 billion.

Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, said he and Obama concur that the massive TARP program needs a "sharp course correction."

Frank has drafted new TARP rules to make the program do more to prevent home foreclosures, limit executive pay and make companies receiving TARP money say what they did with it. Obama agrees on the need for rules along these lines.

But beyond that, the TARP's future is murky.

The first $350 billion of it has already been committed by Treasury Secretary Henry Paulson to aiding Citigroup, insurer American International Group, major automakers General Motors and Chrysler LLC, and others.

TARP VETO SHOWDOWN

A request for the second half of TARP funding was sent to Congress by President George W. Bush, giving lawmakers 15 days to decide whether to block release of the funds.

Senate and House leaders from both parties on Monday voiced wary support for releasing the funds. But many lawmakers are deeply dissatisfied with the handling of the program so far.

Frank, a Massachusetts Democrat, will hold a committee meeting on Tuesday afternoon to air complaints from lawmakers.

House Republican Leader John Boehner said on Monday he opposes releasing the $350 billion. "I remain disappointed about the way TARP has been managed," said the Ohio lawmaker.