Obama may get to spend half of $700B bailout

Treasury Secretary Henry M. Paulson Jr. on Monday signaled that he will leave at least half of the $700 billion Wall Street bailout fund for the incoming Obama administration to spend, as skeptical lawmakers received their first update on the massive rescue plan approved last month.

A separate $25 billion bailout of the beleaguered U.S. auto industry stumbled even before it got out of the gate in this week’s lame-duck congressional session, as rank-and-file Senate Democrats backed away from the plan and the Bush administration ripped the idea of tapping the bank bailout to aid Detroit.

“We’re surprised that Senate Democrats would propose a bailout that fails to require automakers to make the hard decisions needed to restructure and become viable,” said White House spokeswoman Dana Perino.

Congressional sources said the Bush administration has informed lawmakers that it will probably not be tapping the second $350 billion under the program before leaving office in January. Under the terms of the emergency legislation approved in early October, Congress has the right to veto the second wave of spending.

White House spokesman Tony Fratto declined to discuss the administration’s plans, saying the program decisions were being left to Mr. Paulson.

Treasury has spent or committed about $290 billion of the first tranche of $350 billion under the Troubled Asset Relief Program, or TARP.

Mr. Paulson told the Wall Street Journal that he preferred to keep the TARP money in reserve for the next administration.

“I’m going to do what we need to do to keep the system strong, but I’m not going to start up new things unless they’re necessary, unless they make great sense,” he said. “I want to preserve the firepower, the flexibility we have now and those that come after us will have.”

Treasury is carefully couching its position out of concern that financial markets will react negatively to any decision to forgo the additional funds for two months until President-elect Barack Obama takes office.

Many on Wall Street point out there is no guarantee that the financial situation for banks won’t get significantly worse in coming weeks, particularly as defaults on credit cards and prime mortgages rise. In that event, the Treasury might need the additional money to help more banks and financial institutions.

Although originally advertised by Mr. Paulson as a means to buy up “toxic” mortgages and other assets poisoning the balance sheets of major banks and financial firms, the bulk of the money to date has been used to recapitalize banks with taxpayer-financed purchases of their stock.

The shift has raised eyebrows on Capitol Hill.

“We have some questions about the significant alternations that have been made in the implementation” of the bailout, House Speaker Nancy Pelosi told reporters before a private briefing on the bailout with Mr. Paulson and Federal Reserve Chairman Ben S. Bernanke.

House Majority Leader Steny H. Hoyer of Maryland said after the meeting that the Democrats “made it very, very clear that we thought that [Mr. Paulson] ought to be much more vigorous immediately in addressing the issue of how we can stabilize and stanch the continuing daily foreclosures.”

Mr. Paulson, senior banking regulators and bank industry lobbyists are to testify Tuesday morning before the House Financial Services Committee.

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