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Bailout shifts again; floodgates could open

The White House said Friday that Congress needs to free up the second half of the $700 billion federal bailout, setting the stage for a scramble among a wide range of industries.
/ Source: The Associated Press

In another about-face, the Bush administration says Congress needs to free up the second half of the $700 billion federal bailout. And now that automakers are getting a share, the floodgates are almost certain to open for other nonfinancial industries that want government help.

Wobbling insurance companies would likely be among the first to ask for help. Whether they actually get the money will probably be determined only after Barack Obama is sworn in as president.

State and local governments, also facing hard times in what is already the longest recession in decades, are expected to make some appeals. They'll probably keep their primary focus on a likely economic stimulus package next year.

The $17 billion loan to the automakers is another makeover for the bailout, which began as a plan to buy up bad mortgage debt instead of direct cash infusions, and with only banks as customers.

Treasury Secretary Henry Paulson said Friday that using the financial bailout package for loans to automakers basically means the administration has used up the first $350 billion of the fund.

Earlier, Paulson had said he expected to leave the remaining $350 billion to Obama's team. But he said Friday that having Congress free up what's left of the money now was important "to support financial market stability."

The original plan was to buy up bad debt from banks, but Paulson abandoned that approach, in favor of having the government directly buy stock in the banks. Paulson said the first way would have taken too long.

Paulson's statement came out as President George W. Bush ordered an emergency bailout of General Motors and Chrysler. Ford was not expected to seek short-term help.

Paulson said he would consult with congressional leaders and Obama's economic team to determine how to proceed. But he and other Treasury officials did not offer any specific date for when the administration might formally request release of the second half of the bailout fund. Bush leaves office in one month.

The legislation that set up the rescue fund on Oct. 3 requires the administration to submit a report to Congress when it determines it needs the second $350 billion, and to spell out how it will use the money.

Analysts said they saw Paulson's announcement as an effort to assure financial markets that should the second part of the fund be needed, the current administration would move quickly to have it approved by Congress.

But given that a Democratic president and new Congress will take office next month, analysts said the current administration is unlikely to push for full approval to spend the second half of the rescue effort.

"I can't imagine that Congress will actually go through hearings and doing all that needs to be done to get the money released before the next administration is in office," said Mark Zandi, chief economist at Moody's

Representatives of Obama's transition team declined comment.

A request for the second half of the bailout money would run into resistance on Capitol Hill, with key Democrats vowing to block the release of more money unless the administration includes greater efforts to help homeowners threatened with foreclosure.

House Financial Services Committee Chairman Barney Frank, wants the administration to use some of the money must allocate some of the new money for borrowers facing foreclosure and also impose more conditions to make sure banks use their rescue money to increase lending.

Economists say the real question is whether all the government activity will succeed in returning the banking system to more normal lending activity and lifting the country out of recession.

"It is going to be tough to get out of this. People are scared," said David Wyss, chief economist at Standard & Poor's in New York. "How do you restore confidence when the markets have lost it?"