Obama Signals Tough Restrictions on Banks in Rescue Package

Jan. 24 (Bloomberg) -- President Barack Obama signaled that he would toughen restrictions on and oversight of banks as part of a fresh plan to aid the battered industry.

Obama blasted the banks yesterday over reports that they’ve spent money renovating offices after receiving billions of dollars from the government and vowed they would be held accountable for any aid they receive in the future.

The tough talk seemed designed to build support for a rescue plan that aides say Obama will roll out soon by reassuring lawmakers and voters that the administration will keep close tabs on money it hands out. Pressure for a plan is building after the Standard & Poor’s 500 Index fell for the third straight week, in part because of concerns about the health of the banks.

“They’re going to have to take some early action,” said Michael Bleier, a partner at law firm Reed Smith in Pittsburgh and a former Federal Reserve lawyer. “Banks and the financial services industry have to have balance sheets that are strong.”

The administration’s economic team, which will meet with Obama today, has been working on a program to bolster the banks and get them lending again. People familiar with their thinking have said the plan is likely to include fresh capital injections into the banks and steps to clear bad assets off bank balance sheets.

Lawrence Summers, who, as director of the White House’s National Economic Council, is playing a key role in putting together the bank-rescue package, canceled plans to attend the World Economic Forum next week in Davos, Switzerland. So too did Sheila Bair, chairman of the Federal Deposit Insurance Corp., whose agency guarantees bank depositors against loss.

‘Line the Pockets’

White House press secretary Robert Gibbs said the president has directed his advisers to come up with new restrictions on the second half of the $700 billion financial-rescue plan, saying the money won’t go to “line the pockets of people” who’ve gotten financial assistance.

“The American people need to be greatly assured that their hard-earned money is not going to the bonuses or the remodeling of an office at a bank that’s in trouble,” Gibbs told reporters yesterday.

The White House comments came after reports that John Thain, the former Merrill Lynch & Co. chief executive officer who was ousted this week, spent $1.2 million redecorating his downtown Manhattan office last year as the company was firing employees.

Thain oversaw the sale of Merrill Lynch to Bank of America Corp. last month. Merrill’s $15.4 billion fourth-quarter loss forced Bank of America to seek additional aid from the U.S. government, which last week agreed to provide $20 billion in capital and $118 billion in asset guarantees.

Provide Credit

Obama aides said banks that get additional aid will be prevented from using it to finance acquisitions and instead will be pressed to provide more credit to consumers and companies.

The restrictions would follow principles already outlined to Congress by Summers and Timothy Geithner, Obama’s nominee for Treasury secretary, Gibbs said.

Summers told Congress in a Jan. 15 letter that up to $100 billion of the remaining funds will be used to ease the housing crisis. He also promised the administration would restrict executive pay and dividends for financial institutions that get the money.

“Those receiving exceptional assistance will be subject to tough but sensible conditions that limit executive compensation until taxpayer money is paid back, ban dividend payments beyond de minimis amounts, and put limits on stock buybacks and the acquisition of already financially strong companies,” he wrote.

Geithner Support

Senator Bill Nelson, a member of the Finance Committee, said he talked yesterday with Geithner and was told the administration would increase oversight of the TARP money.

“I have received direct assurances today from the nominee for Treasury secretary that he will support disclosures and transparency including for money already spent,” Nelson, a Florida Democrat, said yesterday.

Nelson is co-sponsor of legislation that would require firms receiving the money to disclose how the funds are spent and bar companies from using the money to lobby or make political donations.

The Obama administration has been cleared by Congress to tap the second half of the $700 billion fund to stabilize the financial system. Lawmakers criticized how former President George W. Bush’s administration used the fund, and demanded any further release of funds require greater accountability.

“The Congress is justifiably unhappy over the way the first $350 billion was handled,” said Alan Blinder, a former Fed vice chairman who’s now a professor at Princeton University.

Blinder Doubts

Blinder, who briefed lawmakers earlier this week on the economic outlook, voiced doubts that the remaining $350 billion in the bailout fund would be enough to rescue the financial system and expressed concern that lawmakers would block any additional assistance given the unpopularity of the program.

Blinder, along with Harvard University professor Martin Feldstein and Mark Zandi, chief economist at West Chester, Pennsylvania-based Moody’s Economy.com, painted what Senate Majority Leader Harry Reid described as a dark outlook for the economy in their meeting with lawmakers.

“We have economic problems that have never been seen in this country or the world before,” Reid, a Nevada Democrat, said on the Senate floor.

Blinder forecast that the unemployment rate would rise to 9 percent from 7.2 percent, even with the $825 billion economic stimulus package that Obama is negotiating with Congress.

To contact the reporters on this story: Julianna Goldman in Washington at Jgoldman6@bloomberg.net; Rich Miller in Washington rmiller28@bloomberg.net

To contact the editor responsible for this story: Michael Forsythe at mforsythe@bloomberg.net