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Obama says risks still haunt U.S. financial system

WASHINGTON (Reuters) - The U.S. financial system still faces risks requiring government intervention to avoid a more destructive recession, President Barack Obama said, before a critical week of fleshing out and selling his recovery plan.

President Barack Obama speaks at a Town Hall meeting at the Miguel Contreras Learning Complex in Los Angeles, March 19, 2009. REUTERS/Lucy Nicholson

Obama’s steps to reverse a deep U.S. economic downturn and restructure the ailing banking system have global implications as he prepares to meet fellow leaders of major developed and developing nations at a Group of 20 summit in early April.

But his reform plans and the vast spending envisioned to reboot the world’s largest economy and purge at least $1 trillion in “toxic” assets from banks face steep resistance from some in Congress and corporate boardrooms.

In a key part of the agenda, Treasury Secretary Timothy Geithner is due to unveil long-awaited details of his bank bailout plan at 8:45 a.m. (1245 GMT) on Monday.

But his reform plans and vast spending envisioned to reboot the world’s largest economy and purge U.S. banks of at least $1 trillion in “toxic” assets face steep resistance from some in Congress and corporate boardrooms.

“I think that systemic risks are still out there,” Obama said in an interview with the CBS program “60 Minutes” aired on Sunday.

“There are certain institutions that are so big that if they fail, they bring a lot of other financial institutions down with them. And if all those financial institutions fail at the same time, then you could see an even more destructive recession and potentially depression.”

Obama, a Democrat who inherited the crisis from Republican President George W. Bush, also said he had not anticipated such a sharp economic drop, especially heavy job losses, but he saw “flickers of hope” for a recovery.

Obama’s team is “incredibly confident” the economy will rebound within a year, Christina Romer, head of the White House Council of Economic Advisers, told “Fox News Sunday.”

On CNN’s “State of the Union” show, Romer said she had “every expectation, as do private forecasters, that we will bottom out this year and actually be growing again by the end of the year.

In two key parts of the Obama agenda, Geithner is expected to unveil long-awaited details of his bank bailout plan on Monday and then, at a congressional hearing on Thursday, to expand on proposals for financial regulatory reform.

One aim of the three-part strategy to cleanse the financial system will be to entice private investors with abundant loans and generous terms to buy bad mortgages and other toxic assets, a source familiar with the plan told Reuters on Saturday.

Obama, whose high approval ratings are being tested in his third month as president as public anger rages over big bonuses at bailed-out financial firms, will discuss his recovery efforts in a prime-time news conference on Tuesday.

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PRIVATE MONEY AND PUBLIC OUTRAGE

Geithner has been attacked over his failure to halt bonuses of at least $165 million, and possibly as much as $218 million, paid out to employees by hobbled insurer American International Group, which has been bailed out with about $180 billion in taxpayer money.

Obama has stepped up his defense of Geithner, telling “60 Minutes” he would not accept his Treasury secretary’s resignation even if it were tendered.

Geithner, who dismissed the calls to step down while taking responsibility for the AIG bonuses controversy, has also been criticized over his slow roll-out of the rescue plans for the banking sector that are seen as vital to an overall recovery.

“He’s lost a lot of credibility and a lot of political good will, but he can turn things around,” said Nariman Behravesh, chief economist at IHS Global Insight. “If he can come up with a credible plan, fine. If not, then his days are numbered.

Public anger over the AIG bonuses overflowed last week, prompting the House of Representatives to pass a tax bill to claw back the payouts. The Senate has several of its own ideas about how to deal with executive pay.

Richard Shelby, a Republican member of the Senate Banking Committee, said “it’s possible” heavy taxes on pay may scare away investors from the Treasury’s bank rescue program.

“We have to be careful of unintended consequences in legislation” passed by the House, Shelby told Fox, adding that “no one wants to award taxpayer money to people who have caused institutions to fail.”

The New York Times said the Treasury will also unveil a sweeping plan this week to overhaul financial rules that would seek broader oversight of executive pay.

But an administration official said no announcements were planned for this week and dismissed the idea that executive pay was linked to reform of financial regulations.

Governments around the world are moving to tighten rules on banks, hedge funds, insurers and other firms amid the worst financial crisis in generations -- a priority especially among some European leaders who will meet Obama at the G20 summit.

Adding to the gloom, World Bank President Robert Zoellick said on Saturday the global economy is set to contract by 1 to 2 percent this year and the depth of the slowdown was unprecedented since the Great Depression of the 1930s.

BUDGET BATTLES

The new White House team is also trying to win support for big-ticket items in Obama’s record $3.5 trillion budget proposal for the 2010 fiscal year -- something in very short supply among Republicans in Congress.

“It’s an economic blueprint for our future, a vision of America where growth is not based on real estate bubbles or over-leveraged banks, but on a firm foundation of investments in energy, education and healthcare that will lead to a real and lasting prosperity,” Obama said in his weekly radio address on Saturday.

The budget committees of the Senate and House are set to begin crafting their budget bills this week.

Republican Senator Judd Gregg appeared ready for a fight over the Obama budget that projects deficits of $1.75 trillion this fiscal year and $1.17 trillion next fiscal year.

“If we maintain the proposals which are in this budget over the 10-year period that this budget covers, this country will go bankrupt,” he told CNN. “People will not buy our debt. Our dollar will become devalued.”

The head of the Senate budget committee said he favors higher spending in the short term but that fiscal discipline was critical in the long term.

“I will present a budget that I think begins to move in that direction,” Democratic Senator Kent Conrad said on ABC’s “This Week With George Stephanopoulos.

“It acknowledges in the short term, yes, we have got to have added deficits and debt to give lift to this economy but, longer term, we have got to pivot.”

Additional reporting by Philip Barbara, Eric Beech, Deborah Charles, Emily Kaiser, David Lawder and Tabassum Zakaria; editing by Todd Eastham

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