Eager to shift the course of the government’s financial sector bailout fund, President-elect Barack Obama and congressional Democrats want to apply greater scrutiny and a more defined mission to the beleaguered $700 billion rescue program.
The House could act as early as next week on a new tack for the Troubled Asset Relief Program that would set tougher conditions on recipients of the money, including limits on executive pay, and require the Treasury Department to use some of the money to reduce mortgage foreclosures.
At the same time, Obama’s selection for treasury secretary, Timothy Geithner, is broadening the program’s goals, aiming to unfreeze credit for homeowners, consumers, small businesses and local governments.
An Obama transition official said Geithner and Obama’s economic team are developing a “comprehensive set of investment principles” that would also embrace restrictions on how the money is spent, limits on executive compensation for fund recipients and a plan to address rising foreclosures.
The changes come amid bipartisan criticism that the Bush administration’s handling of the first $350 billion of the program has been unfocused, confusing and inconsistent. But the new approach also signals a significantly greater government intrusion into the workings of financial institutions than the Bush administration was willing to undertake.
The money so far has been used to support ailing companies such as insurance giant American International Group, Inc. and automakers General Motors Corp. and Chrysler LLC. It also has pumped billions of dollars into banks in hopes of freeing up credit for loans. But critics have complained that the money has had few string attached and has not been used effectively to address the nation’s housing crisis.
‘Trust but verify’
Legislation introduced Friday by House Financial Services Committee Chairman Barney Frank, D-Mass., and changes under consideration by Obama’s team would place compensation limits on executives of institutions that receive the money. Frank’s bill would permit the Treasury to apply the pay restrictions retroactively and would even force such institutions to get rid of any private aircraft they may own or lease.
The bill also would require that the new Obama administration spend between $40 billion and $100 billion of the remaining $350 billion on foreclosure mitigation. Since Congress approved the rescue program in October, congressional Democrats and Obama have insisted that some of the money be used to help homeowners on the brink of foreclosure.
Frank said Friday he has been working closely with Obama transition officials on the legislation and said he trusts Obama officials to run the program effectively. But, he added, “In this case we are Reaganites, we intend to trust but verify.”
With 11 days left before Obama is sworn in as the nation’s 44th president, the task of requesting Congress for access to the remaining funds will now likely fall on the new Obama administration.
Geithner is expected to face a confirmation hearing before the Senate next Thursday and he can count on being quizzed vigorously on his TARP proposals.
Though the Obama team is not offering any specifics, the mere fact that it is setting goals for the money won support from the head of a congressional panel that is charged with overseeing how the money is being spent.
“These are powerfully important initiatives,” said Harvard law professor Elizabeth Warren, head of the panel. “I’m very pleased that the incoming administration is focused on these issues.”
Clear delineation needed
The Congressional Oversight Panel released a report Friday detailing questions about how banks are spending taxpayer money, how the money will combat the rising tide of home foreclosures and Treasury’s overall strategy for the rescue. In instance after instance, the panel said, the Treasury Department did not offer adequate responses.
Even bankers have complained that the handling of the rescue fund so far has been chaotic.
In testimony that had been prepared for a congressional hearing last week, Edward L. Yingling, the president and CEO of the American Bankers Association, said the program should be divided into distinct funds — one to infuse capital into banks, one to address foreclosures and one to assist troubled institutions.
“Without clear delineation, policy becomes muddled,” Yingling said in prepared remarks. The hearing, by Frank’s committee, was rescheduled to next Tuesday.
Scott Talbott, a senior vice president at the Financial Services Roundtable, an industry group, said it welcomed many of Frank’s provisions but opposed the proposal that would allow Treasury to apply compensation limits to current recipients of the TARP money.
Frank conceded that his legislation may not clear the Senate, where Democrats hold a majority but where significant legislation usually requires 60 votes to overcome procedural obstacles. Frank said that if his bill passed the House with a large majority, he’d be willing to accept the word of the Obama team “that they will act as if it were law.”
Under the terms of the program, the executive branch must go to Congress to request access to the second half of the $700 billion.