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 at 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. [nN09294312]
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.
Congress must give its blessing before the Treasury can dole out the remaining rescue funds and senior Democrats are talking with the George W. Bush administration about making a request as soon as this weekend, sources familiar with the talks said. If that request is approved in the next few days, the rescue cash could be available soon after Obama takes office on January 20.
The White House said Friday evening that it is talking with the Obama team about whether to request the final allotment of aid.
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.
Defending his decision to use TARP to fortify banks, Paulson told Bloomberg Television he was “absolutely convinced they are the right things.” He said the program should continue to add capital to the banking system in order to speed an economic recovery.
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.
“If they don’t like it, they can give the money back,” Frank, a Massachusetts Democrat, told reporters on Capitol Hill.
The bill would give smaller banks access to TARP funds and set benchmarks for institutions to meet in expanding their lending. It also would prohibit the use of TARP funds to acquire a “healthy” institution.
Work on overhauling TARP comes as Geithner is preparing for a Senate confirmation hearing expected to take place next week, probably on Thursday.
Senators will be eager to question Geithner on his plans for TARP, among other subjects, just as they regularly grilled Paulson on the subject.
Geithner is considering creating a new bureau within Treasury to oversee TARP, the Obama aide said.
Additional reporting by Kevin Drawbaugh and John Poirier; Editing by Bernard Orr