Fed Backs Obama's Bailout Request

By Neil Irwin and David Cho
Washington Post Staff Writers
Wednesday, January 14, 2009

Top officials of the Federal Reserve yesterday offered the most detailed proposals yet for overhauling the rescue of the financial system, urging Congress to release the next batch of bailout money and arguing that a stimulus program alone is not enough to keep the economy from plunging further into recession.

The Fed leaders spoke as President-elect Barack Obama worked Capitol Hill, trying to persuade Democratic senators not to block a request for the last $350 billion of the bailout funds and assuring them that he is willing to use his veto power if they do so, according to participants in his lunchtime meeting with lawmakers.

Obama added that he would prefer to avoid making a politically awkward veto against a Democratic Congress one of his first official acts as president.

In laying out their ideas on how to disburse funds from the second half of the $700 billion financial rescue program, Fed leaders offered a more detailed vision than have aides to Obama. Lawmakers on both sides of the aisle have voiced consternation and even anger that they have not been given more specifics on how the money would be used.

Among other steps, Federal Reserve Chairman Ben S. Bernanke and vice chairman Donald L. Kohn suggested taking troubled assets off the books of banks -- a strategy that Fed officials backed before it was abandoned months ago -- and also using some of the money to help homeowners at risk of foreclosure.

Bernanke, in a speech in London, argued that "fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system."

His speech, along with separate congressional testimony yesterday by Kohn, amounted to an aggressive new pitch to Congress for more money for the financial rescue, known as the Troubled Asset Relief Program. Although it's an independent agency, the Fed has a consultative role in deploying the money, and Kohn has represented the Fed in conversations with the Obama transition team on how to use the cash.

One idea Bernanke and Kohn described is a throwback to the original vision of the rescue package that Bernanke and Treasury Secretary Henry M. Paulson Jr. pitched in September. They said the government could buy up bad assets that banks hold or otherwise protect them from further losses.

Paulson sold Congress on that strategy during the original debate over the rescue, then abruptly changed direction after it passed. Paulson concluded that asset purchases would be too slow to implement to end the October tailspin of the financial system.

Bernanke, speaking yesterday at the London School of Economics, said the government could buy troubled assets at auction, as the program was initially conceived. He also spelled out alternative approaches he had not aired before: insuring banks against further losses on those assets in exchange for stock or creating a "bad bank" that would hold the bad assets.

"The presence of these assets significantly increases uncertainty about the underlying value of these institutions and may inhibit both new private investment and new lending," Bernanke said.

Kohn, in written testimony to the House Financial Services Committee, said that the Fed could expand a program it is already creating in which Fed loans and TARP rescue money are combined to support lending through credit cards, auto loans, student lending and small-business loans.

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