Obama Advisers Say They Will Aim TARP at Wider Credit

By Matthew Benjamin

Jan. 19 (Bloomberg) -- Top advisers to President-elect Barack Obama signaled they will emphasize getting credit to consumers and businesses rather than helping banks as the new administration deploys the second half of the $700 billion rescue fund.

“The focus isn’t going to be on the needs of banks; it’s going to be on the needs of the economy for credit,” Lawrence Summers, the president-elect’s top economic adviser, said on CBS’s “Face the Nation” program yesterday. Obama’s team will manage the Troubled Asset Relief Program “in a much different way,” David Axelrod, Obama’s chief political adviser, said on ABC’s “This Week” program.

Obama’s advisers are considering options for dealing with troubled assets still clogging banks’ balance sheets, according to people familiar with the matter. Among alternatives: Setting up a government-backed “bad” or “aggregator” bank to hold the securities, or leaving the assets on banks’ books and providing a government guarantee.

While Summers and Axelrod didn’t discuss specific proposals, they emphasized they don’t agree with Treasury Secretary Henry Paulson’s decision to commit most of the initial $350 billion of the TARP funds to capital injections in exchange for warrants and preferred equity.

“The point is to get credit flowing again to businesses and families across the country -- that hasn’t happened with the expenditure of the first $350 billion,” Axelrod said.

Swearing-In

Last week’s sell-off in financial stocks and the deepening recession put pressure on Summers and Treasury Secretary- designate Timothy Geithner to unveil a comprehensive program soon after Obama is sworn in tomorrow. Without a radical new effort, soaring credit losses could prolong and deepen a recession that is now more than a year old.

Most stocks in Europe and Asian shares today gained on speculation that U.S. and U.K. government plans to spur lending will prevent the recession from worsening.

Former Federal Deposit Insurance Corp. Chairman William Isaac today told Bloomberg Television that creating a bank for toxic assets would get credit flowing and that he is “very supportive” of creating an aggregator bank.

The TARP may be redirected to help prevent foreclosures as well as free up credit for “automobile loans, consumer credits, small business, municipalities,” Summers said. He added banks will be subject to more oversight in their use of the funds.

Bank Mergers

“There’s going to be a very different level of rigor in the evaluation of institutions, the plans that are designed, and the expectations for institutions,” Summers said. “Institutions that are healthy, that don’t need it just to survive, are going to be expected to lend above their baseline levels as part of this program.”

Geithner and his advisers will be “carefully” monitoring Wall Street bonuses of banks that have participated in the TARP, Summers said.

“What’s not going to happen is the funds that could be supporting increased lending are going to be used to finance acquisitions that may serve a bank but don’t serve the country,” Summers said. The new administration will also prevent banks that accept government funds from pursuing acquisitions to the detriment of increased lending, he said.

Summers said he is confident Congress will pass a spending plan, coupled with tax cuts, similar to the $825 billion package that Obama has offered. Such a stimulus has been forecast to create 3 million to 4 million jobs, he said.

“I expect the program will pass within in a month,” Summers said. “He is going to do what is necessary to get us out of this economic hole.”

Economic Reports

The U.S. economy showed further signs of buckling, according to reports last week. Consumer prices fell 0.7 percent in December, capping the smallest annual increase since 1954, the Labor Department said. Industrial output shrank 2 percent, and the capacity-utilization rate slid to 73.6 percent, according to the Fed. A private survey showed consumer sentiment was little changed in January.

“There’s almost no question that the economy is going to decline for some time to come,” said Summers, who served as Bill Clinton’s last Treasury secretary. “Our errors are not going to be of standing back.”

To contact the reporter on this story: Matthew Benjamin in Washington at mbenjamin2@bloomberg.net