Kashkari Says TARP Working, Banks Obligated to Lend

By John Brinsley

Dec. 5 (Bloomberg) -- The U.S. Treasury’s $700 billion financial-rescue plan will benefit consumers and businesses because banks have an obligation to lend money they receive from the government, the head of the program said.

“We are confident we are pursuing the right strategy to stabilize the financial system and support the flow of credit to our economy,” Neel Kashkari, the Treasury’s interim assistant secretary in charge of the Troubled Asset Relief Program, said in a speech today in Washington. “As confidence returns, we expect to see more credit extended.”

The comments come as members of Congress heighten their criticism of Treasury Secretary Henry Paulson’s management of the program. Two top Democratic lawmakers yesterday warned that Paulson, who has used all but $20 billion of the first half of the funds, may not get the remaining $350 billion.

Kashkari said the banking system is “more stable” now than in October, when Congress passed the legislation. Firms that have taken money from the program should increase their lending, “particularly in this time of economic disruption,” he told a Mortgage Bankers Association conference.

Banks “have an obligation to continue making credit available to creditworthy borrowers and an obligation to work with borrowers who are struggling to avoid preventable foreclosures,” he said. “This lending won’t materialize as fast as any of us would like, but it will happen much faster as a result of using the TARP.”

‘Healthy Banks’

Kashkari said the narrowing of credit-default swap spreads for the nation’s eight largest banks shows the program is working.

Paulson is under fire for dropping plans to buy toxic mortgage assets, as originally intended, and instead directly injecting capital into banks. Republican lawmakers this week sent a letter to the Treasury chief saying they would block a request for the second half of the funds without more details on how the money is being used.

Senate Banking Committee Chairman Christopher Dodd, Democrat of Connecticut, yesterday said he would be “a very hard person to convince that this crowd deserves to have their hands on the next $350 billion.”

Another Democratic leader, House Financial Services Committee Chairman Barney Frank of Massachusetts, yesterday said The Treasury has ignored the “clear congressional intent” of the TARP to reduce home foreclosures.

Kashkari said the Treasury is working to determine the impact of the capital injections, a point raised by a report this week from the Government Accountability Office, which called on the department to bolster its supervision of the plan.

“Tracking where individual dollars flow through an organization is also difficult,” Kashkari said.

To contact the reporters on this story: John Brinsley in Washington at jbrinsley@bloomberg.net;