Paulson May Seek Next $350 Billion in Financial-Rescue Funds

By Rebecca Christie and Robert Schmidt

Dec. 18 (Bloomberg) -- Treasury Secretary Henry Paulson may ask Congress for the second half of the $700 billion bank rescue program, concerned that the deepening recession may spark further financial turmoil.

Paulson could soon exhaust the first $350 billion with the bailout that President George W. Bush’s administration has pledged for General Motors Corp. and Chrysler LLC. The Treasury chief is discussing with aides strategies to seek congressional approval for the rest of the Troubled Asset Relief Program, people familiar with the deliberations said.

“We’re far from out of this” financial crisis, said Joseph Mason, a Louisiana State University professor in Baton Rouge who previously worked at the Treasury’s Office of the Comptroller of the Currency. “It’s actually not hard to imagine a transition of power where Obama walks in on the tail end of a crisis” with no funds left in the rescue package.

Securing the extra money would give the Treasury a cushion in case another bank or insurer neared collapse. The obstacle: Democratic lawmakers have warned the Bush administration it must come up with a new effort to aid homeowners in danger of losing their properties.

Paulson hasn’t made a final decision. He continues to look at ways to use the money as well as when to move ahead, the people familiar with his plans said.

In a meeting with Bush last week, Paulson asked the president to publicly support a request for the $350 billion, a person familiar with the meeting said.

Auto-Aid Leverage

The Treasury hasn’t been shy about using its role helping bail out the auto companies as a potential negotiating tactic to get the additional funds, lobbyists and congressional staff said.

Paulson said two days ago that U.S. automakers will receive federal aid as soon as the government can draft a suitable plan that ensures the companies’ long-term survival. A possible cash infusion of $15 billion for GM and Chrysler would mean that Paulson has allocated the full first half of the TARP that Congress approved in October.

Treasury aides have also been working on programs designed to ease the housing crisis. While most Republicans on Capitol Hill are opposed to giving Paulson any more money, the Democrats could take Paulson’s actions on housing and the car industry as positive steps, and not mount a campaign against the request, lobbyists and congressional staff said.

Wave of Distress

Engulfing the Treasury chief are concerns that the government, in addition to rescuing automakers, may face another wave of economic distress in the final days of an administration that hands off on Jan. 20 to President-elect Barack Obama.

The U.S. economy may shrink more than 6 percent in the last three months of this year, private forecasters are projecting. Chrysler yesterday said it will idle all 30 of its plants for at least a month as demand plummets.

To access the rest of TARP, Paulson must convince the White House to report to Congress that the funds are needed to preserve financial stability. Lawmakers then have 15 days to pass legislation blocking the money, a resolution that in turn could lead to a veto.

Some members of Congress have warned Paulson they will stand between him and the money.

“Please don’t come here and ask for another penny, because if you do, I’m going to work 24 hours a day with the same people that I worked with to support you to make sure that they do not support giving you another dime,” said Representative Maxine Waters, a California Democrat, at a Dec. 10 House hearing.

‘More Harm’

House Financial Services Chairman Barney Frank said at the same hearing that the Bush administration should get congressional consent for the funds. Frank said a veto fight would do “more harm than good.”

Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, told reporters last week that Congress wasn’t likely to give Paulson the funds unless the Treasury made a strong effort to help average Americans.

“Show me some leadership on the foreclosure mitigation issue, show me some leadership on consumer credit, and I think that door opens up,” Dodd said at a Dec. 12 press conference.

Paulson has sent mixed messages publicly. He has said in recent weeks that the Treasury is making good progress with the first $350 billion of rescue money. So far, he’s pledged $335 billion of those funds to recapitalize the banking system and rescue American International Group Inc. He has also indicated he’d consider letting automakers access some or all of the remaining $15 billion even if the Treasury doesn’t seek the extra money.

New Programs

Paulson and his aides have said they’re working on new programs and he’s indicated that if he sees an urgent need, he won’t hesitate to engage in the legislative process for seeking the second half of the bank bailout funds.

“I don’t have a timeline for drawing down the second half of the TARP,” he told reporters in Beijing on Dec. 4. “If and when I see a need to draw that tranche down, I’m confident that process will work.”

To contact the reporter on this story: Rebecca Christie in Washington at Rchristie4@bloomberg.net; Robert Schmidt in Washington at rschmidt5@bloomberg.net;