Lawmakers seek reform of bailout

Upset about how the first half of the $700-billion Wall Street bailout fund was spent, lawmakers are working with incoming Treasury Secretary Timothy F. Geithner to impose tougher restrictions on recipients of the remaining money and make sure a large chunk is used to help homeowners avoid foreclosure.

President-elect Barack Obama’s transition team and Bush administration officials are discussing the possibility of notifying Congress before the inauguration of their plans for using the second $350 billion, which would trigger a 15-day period in which lawmakers could block the move. And although Geithner and Obama’s economic team are working on their own reforms of the Troubled Asset Relief Program, Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, introduced legislation Friday to mandate numerous changes.

“We intend to trust, but verify,” Frank said, invoking a phrase made famous by President Reagan in describing his approach to arms negotiations with the Soviet Union.

“We intend to say that if they are going to spend the second $350 [billion] -- as I think they should, I think there is a need for it in the economy -- it will be done in a reasonable way.”

When Congress approved the $700-billion fund last fall, Treasury Secretary Henry M. Paulson said he intended to use the money to buy troubled mortgage-backed securities to stop the failures of large financial institutions and ease the economic crisis. Lawmakers also gave Paulson the authority to use some of the money to revise existing mortgages to reduce foreclosures.

Paulson did neither. Instead he used almost the entire first half of the fund to inject money directly into banks to try to ease the credit crunch. But rather than risk lending it, most banks apparently held onto the money.

That angered many lawmakers, who were further upset that Paulson had not expressly required the banks to lend the money.

Frank’s legislation would mandate that between $40 billion and $100 billion of the remaining TARP money be used to help modify existing mortgages to avoid home foreclosures. Treasury officials would have to craft a plan by March 15 and start funding it by April 1.

The bill would tighten executive compensation requirements on recipient firms, bringing them in line with the tougher restrictions recently placed on U.S. automakers that are receiving federal aid. The restrictions would apply retroactively.

The bill also would require the Treasury Department to make banks and other institutions receiving TARP funds to commit to how they would use the money.

Frank said he hoped the legislation would pass the House next week, building off broad dissatisfaction from Democrats and Republicans about how the Bush administration has used the money so far.

“But if the bill passes the House with a large majority, and we have smart and cooperative people in this [incoming] administration, I’m willing to accept their word that they will act as if it were the law,” Frank said.

Obama transition officials did not comment on the legislation.

Paulson said this week it was up to Obama’s team to decide whether the Bush administration would make a last-minute request for the second half of the TARP money. That would start the clock running on the 15 days Congress has in which to block use of the funds.

“We’ve been quite clear with them that if they would like us to notify Congress on their behalf . . . we’re willing to work with them on it,” Paulson said.

Obama has said he wants to reduce home foreclosures. And Geithner and the incoming administration’s economic team have been working on a major overhaul of the TARP program to improve its operation and oversight, a transition official said.

Frank said he had several conversations with Geithner about how the rescue fund money should be used.

Frank introduced his legislation as the bipartisan Congressional Oversight Panel established to monitor TARP released a report Friday criticizing the Treasury Department for the lack of information about the program, particularly about how banks were using the money they received.

“For Treasury to advance funds to these institutions without requiring more transparency further erodes the very confidence Treasury seeks to restore,” the report said.

It noted that Treasury officials provided incomplete answers, or none at all, to many of the 45 questions about TARP the panel submitted last month. Some of the questions “seek to clarify what appear to be significant gaps in Treasury’s monitoring of the use of taxpayer money,” according to the report.

“I’m shocked that we have to ask these questions, but what I will say is I’m not giving up,” the panel’s chairwoman, Harvard law professor Elizabeth Warren, said on ABC’s “Good Morning America” show on Friday.

The Financial Services Roundtable, which represents large financial institutions, said it supported Frank’s efforts to avoid foreclosures by increasing the fund for loan modifications for struggling homeowners. But it opposed retroactively applying tougher executive compensation requirements to banks receiving TARP money.

Among those tougher provisions are a prohibition on bonuses or incentives to a company’s 25 best-compensated employees and a requirement that firms receiving TARP funds not own or lease private aircraft.

Under the existing law, only the five highest-paid executives have compensation restrictions.

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jim.puzzanghera@latimes.com