Tuesday, January 13, 2009

President Bush Formally Requested the 2nd $350 Billion of TARP Funds at the Request of President-Elect Obama

Republican and Democratic Senate leaders signaled on Monday that they would support the release of the second half of the Treasury’s $700 billion financial system bailout fund, despite anger among many rank-and-file lawmakers over the Bush administration’s management of the program.

As Congress prepared to act, regulators directed thousands of banks to provide more information about how they have used the money received through the bailout program, responding to concern that financial institutions were hoarding the cash rather than lending it to businesses and consumers.

President-elect Barack Obama said on Monday that like Democrats and Republicans on Capitol Hill, his administration would demand substantially greater oversight of the program.

President Bush on Monday formally requested the $350 billion from Congress at the urging of Mr. Obama.

Under the bailout law, Congress can block the money but only if the House and Senate act to do so. The Senate is expected to vote on the request as early as Thursday.

Aides said that Mr. Obama would attend the weekly lunch of Democratic senators at the Capitol on Tuesday, where he was expected to encourage his former colleagues to approve the bailout money as well as discuss details of his proposed $800 billion recovery package.

Mr. Obama made calls to a number of senators in both parties Monday, including Kent Conrad (D-ND), the chairman of the Budget Committee.

After a meeting with the president of Mexico on Monday, Mr. Obama said the additional $350 billion would be critical to his efforts to stabilize the economy.

"It is clear that the financial system, although improved from where it was in September, is still fragile, and I felt that it would be irresponsible for me with the first $350 billion already spent, to enter into the administration without any potential ammunition should there be some sort of emergency or weakening of the financial system," Mr. Obama said.

"I think many of us have been disappointed with the absence of clarity, the lack of transparency, the failure to track how the money’s been spent and the failure to take bold action with respect to areas like housing, consumer credit, so that we can maintain credit," he said.

In conjunction with Mr. Bush’s announcement, Lawrence H. Summers, Mr. Obama’s designee to be director of the National Economic Council, sent a letter to Congressional leaders, pressing them to approve the funds and promising to overhaul the bailout program, including more oversight and a sweeping new effort to prevent home foreclosures.

Mr. Summers said the Obama administration would also impose tough conditions on companies receiving aid, including limits on executive pay and shareholder dividends. "We will ensure that resources are directed to increasing lending and preventing new financial crises and not to enriching shareholders or executives," he wrote.

Separately, the Federal Deposit Insurance Corporation (FDIC) also moved on Monday to reassure critics who had complained that banks were not using the bailout money as intended to increase the flow of credit.

The FDIC directed the 5,100 banks that it regulates to document how they have used government money that they have received.

The agency did not spell out or even imply how much of the money that banks receive should go toward new lending, as opposed to building capital reserves or making acquisitions. But in requiring the banks to provide information, the FDIC went further than any of the other federal regulators to put pressure on lenders.

The Senate’s approval of the $350 billion would be a big relief for the Obama administration, which is hoping to avoid a messy legislative battle just as the new president takes office. That outcome seemed increasingly likely as some influential senators said they would urge their colleagues to approve the money.

"It’s extremely important that we make these dollars available to the new administration so there is as much flexibility as possible to stabilize the financial system," Senator Judd Gregg (R-NH) said. Critics, including an oversight panel, have accused the Bush administration of badly mismanaging the program, in part by not adequately tracking how private banks have used bailout funds.

But some lawmakers said the bailout, formally called the Troubled Asset Relief Program or TARP, had accomplished its main goal by preventing a further deterioration of the credit and stock markets.

"Without the first TARP, we may have a Dow at 4,000 right now and the economy in an absolutely free fall," Mr. Conrad said.

But the request for the bailout money is still certain to generate impassioned debate.

Mr. Conrad, in an interview, said that the letter from Mr. Summers and the phone call from Mr. Obama had addressed all of his concerns and convinced him that the new administration should be trusted with the $350 billion. But he said other lawmakers could be harder to convince.

"I think it is going to take communications from the president-elect and repeated outreach to my colleagues because people feel so burned by the previous administration’s handling of the authority given to them," Mr. Conrad said.

The Senate Republican leader, Mitch McConnell of Kentucky, said he was reluctant to provide the additional money.

"The American people have a lot of questions about how additional funds would be used," Mr. McConnell said. "I would be hard pressed to support additional funding for the TARP without sufficient assurances this money will not be wasted, misspent or simply used for more industry-specific bailouts."

Some lawmakers, including the House Republican leader John A. Boehner (R-OH) have said they will oppose disbursing the $350 billion.

Other critics, including Barney Frank (D-MA) have expressed a willingness to release the money provided conditions are attached to it. Mr. Frank has drafted a bill that would impose those controls and would also require at least $40 billion of the new money be used for home foreclosure prevention efforts. And in a sign that Mr. Obama’s assurances just might not be enough, House Democratic leaders said they would push to approve Mr. Frank’s bill this week.

Even if the Senate approves the bailout money, the House will have to vote as well. And some Democratic aides said it was difficult to envision approval of the money without Mr. Frank’s bill also being adopted.

Additionally, the Treasury Department, under threat of a subpoena, agreed on Monday to turn over to Senator Carl Levin (D-MI) copies of the 10 contracts it had signed with major Wall Street firms under the $700 billion federal bailout program.

The documents were requested in late October by Mr. Levin, who heads the Permanent Subcommittee on Investigations. The subcommittee has no plans to make the contracts public, an aide to Mr. Levin said.

The companies are AIG, Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Merrill Lynch, Morgan Stanley, State Street Corporation and Wells Fargo.

Sources: New York Times, The Wall Street Journal

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