Obama vows better control of $350 billion bailout cash

WASHINGTON Tue Jan 13, 2009 8:53pm GMT

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WASHINGTON (Reuters) - U.S. President-elect Barack Obama promised on Tuesday stricter control over a financial rescue package, winning over some sceptical lawmakers who had threatened to block release of $350 billion (£242 billion) that regulators said the economy urgently needed.

In the first big test of how he will work with Congress and tackle dissent from within his own Democratic party, Obama told Democrats that he shared their concerns about lax oversight of the bailout fund that was approved last year.

"He made a strong economic case and he answered every element of frustration that senators have about how" the first half of the $700 billion fund was spent, Sen. Joe Lieberman said after attending a lunch meeting with Obama.

"He deserves to get what he wants here," said Lieberman, a Connecticut independent who works with Democrats.

Senate Majority Leader Harry Reid said he thought he could muster the necessary votes in the Senate to approve the measure, but many lawmakers from both parties have called for tougher regulations on how the government doles out the money and what companies receiving the cash must do.

Obama -- who takes over from President George W. Bush on January 20 -- promised Democrats that there would be greater accountability under his administration, but it was not clear whether he had quelled all the opposition.

If enough lawmakers vote against releasing the funds, Obama may face the awkward situation of having to quickly wield his veto power to push through an unpopular policy. A vote could come as early as Thursday.

Many members of Congress are unhappy with the handling of the first $350 billion of the bailout fund, which was hastily approved shortly after the financial crisis intensified following the failure in September of Lehman Brothers.

But top U.S. regulators argued that the still-ailing financial system urgently needed the second $350 billion, and without it the recession, now over a year old, may deepen.

Under the terms that Congress approved last year, half the money was released immediately and the government had to formally request the second half.

At Obama's request, Bush asked on Monday for the remaining $350 billion, starting a 15-day countdown for Congress to reject it or let the money flow.

OK, IF....

Rep. Barney Frank, the Massachusetts Democrat who chairs the House of Representatives Financial Services Committee, has proposed rules that would require banks receiving government money to give more detail on how they spend it, and to accept limits on executive compensation.

His proposal also requires that at least $50 billion of the money go towards helping homeowners facing foreclosure.

At a hearing with regulators on Tuesday, Frank said the remaining money should be released with the tougher conditions that he proposed because it was needed to help the housing market.

Officials from the Federal Reserve and the Federal Deposit Insurance Corp acknowledged the remaining money was badly needed both to shore up banks and to help repair the housing market.

They also suggested that some of the money could be used to buy bad assets that banks are struggling to value or sell -- which was the stated intent when the Bush Administration originally proposed the bailout fund.

Some Republicans are reluctant on political grounds to promote more government intervention in the economy, while many Democrats object to how the first $350 billion has been handled.

ENOUGH VOTES

Illinois Democrat Sen. Dick Durbin said earlier on Tuesday that winning Senate approval for releasing the money would be "challenging" and Utah Republican Sen. Orrin Hatch told Reuters that there were probably enough Senate votes to block it.

If that happens, Obama could overturn the decision with a veto after he takes office on January 20. Congress would then need to muster a two-thirds majority to override it, which would be difficult.

A congressional fight would also add to uncertainty among investors who are eager for a clearer sense of how Washington intends to combat the financial turmoil and recession.

Most of the initial $350 billion has gone to buy stakes in banks. Lawmakers have accused Treasury of giving out the cash with too few conditions on how it would be used, leaving banks free to hoard public money.

"The American people still don't have assurances that this money will not be wasted or misused to play favourites," Senate Republican leader Mitch McConnell said.

(Additional reporting by Kevin Drawbaugh, Donna Smith, Thomas Ferraro, Jeremy Pelofsky and Mark Felsenthal; Writing by Emily Kaiser, editing by Philip Barbara)

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