Obama team working on overhaul of financial rescue

By Caren Bohan

WASHINGTON (Reuters) - President-elect Barack Obama's economic team is working to overhaul the $700 billion financial rescue program to stem mortgage foreclosures and spur the flow of credit to the struggling U.S. economy, an Obama aide said on Friday.

The Washington Post reported earlier that Treasury Secretary nominee Timothy Geithner was working with top Obama economic adviser Larry Summers and other aides to hammer out a new approach to managing the Troubled Asset Relief Program, also known as TARP.

The transition official, who spoke on condition of anonymity, confirmed that such an effort was under way and that part of it would likely include using some money to help homeowners avoid foreclosures.

The Obama team is also looking at ways to expand the program to help generate loans to municipalities, small businesses and consumers.

Departing Treasury Secretary Henry Paulson said on Wednesday that Obama, who takes office on January 20, will decide how to spend the remaining half of the $700 billion bailout fund. Paulson has earmarked more than the first $350 billion for investments in financial institutions and loans to struggling U.S. automakers.

The Democratic-led Congress must approve the release of the second $350 billion. Many lawmakers have criticized Paulson's approach to use the bulk of the funds to bolster bank balance sheets -- only to see credit further restricted and some Wall Street firms still paying big bonuses to executives and dividends to shareholders.

Some key Democrats have insisted that aid for struggling homeowners be a part of any request for the remaining funds.

REPORT CRITICIZES TREASURY