Obama working out spending and limits for bailout

[February 03, 2009]  WASHINGTON (AP) -- The Obama administration is tackling the bailout of the battered financial sector on two tracks: overhauling how the government spends the money while devising new executive compensation restrictions for banks that get it.

Administration officials said the pay limits could be announced this week, but said the more complicated task of setting up a new framework for rescuing the nation's ailing banks would have to wait until early next week.

President Barack Obama, in a grim assessment of the financial industry, said Monday he would probably need more money to bail out troubled institutions to ease a suffocating credit crunch. Still, he added, "some banks won't make it."

The Treasury Department is expected to announce new rules that limit executive pay for companies that receive "exceptional assistance" under the bailout program.

Obama reacted angrily last week to reports that banks gave more than $18 billion of bonuses at a time when they were relying on taxpayer money for their survival.

Administration officials say rules under consideration would prohibit institutions receiving "exceptional assistance" from giving severance payments to their top 55 executives. Their bonus pools would be reduced by about 40 percent from the 2007 level. Such companies would include Citigroup Inc., insurance giant American International Group Inc. and automakers General Motors Corp. and Chrysler LLC, all of whom received bailouts under the Bush administration.

In the Senate, Republican leader Mitch McConnell, R-Ky., urged the administration to proceed with caution.

"I think we're all appalled by these -- some of these executive salary arrangements and bonus arrangements and perks and all the rest," he said. "On the other hand, I really don't want the government to take over these businesses and start telling them everything about what they can do. Then you truly have nationalized the business."

Neither Obama nor other administration officials said how much a renewed rescue plan might cost. It is possible that additional help could come from the Federal Reserve, not from Congress.

Still, Obama's acknowledgment reinforced what many economists and bank industry officials have speculated for weeks.

"We can expect that we're going to have to do more to shore up the financial system," Obama said in an interview with NBC News that aired Monday.

Treasury Secretary Timothy Geithner plans to announce a new framework for rescuing the financial sector in a speech next week. The plans will focus on how to use the remaining $350 billion in the $700 billion Troubled Asset Relief Program that Congress approved last fall. It will include new programs aimed at helping homeowners stave off foreclosure, and efforts to stabilize the banking sector.

Officials are considering setting up a government-run "bad bank" to take on the bad debts and investments of financial institutions. In addition, the Treasury could seek help from the Federal Reserve and the Federal Deposit Insurance Corp. to provide banks with guarantees against losses on assets backed by residential and commercial real estate loans, as it did with Citigroup in November.

"We're going to have to wring out some of these bad assets," Obama said.

Meanwhile, Senate Republicans sought to ease the clogged credit market by proposing to give banks an incentive to make loans at rates between 4 percent and 4.5 percent. They offered the plan as part of an alternative to a Democratic economic recovery proposal.

[Associated Press; By JIM KUHNHENN]

Associated Press writer Daniel Wagner, Special Correspondent David Espo and White House Correspondent Jennifer Loven contributed to this story.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.