Bank of America Corporation - BAC
By DEBORAH SOLOMON and GREG HITT
WASHINGTON -- The Senate cleared the way for President-elect Barack Obama to access the second half of the $700 billion financial rescue fund, alleviating some concern on Wall Street by setting the stage for another infusion into the weakening financial sector.
To overcome political objections, the incoming Obama administration pledged to spend $50 billion to $100 billion on a "sweeping" foreclosure-prevention effort. It also said it would impose tougher restrictions on banks that receive government aid, including requirements on banks to lend money, increased restrictions on executive compensation and curtailed dividend payments for some firms.
Mr. Obama said he was "gratified" by the vote, an early test of Democratic loyalty to the president-elect. "Now my pledge is to change the way this plan is implemented and keep faith with the American tax payer" by imposing new conditions and regulations, he said in a written statement.
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Congress's release of the funds, which wasn't a certainty, comes amid continuing woes in the banking sector. The government is crafting a plan to give billions in aid to Bank of America Corp. to help close its acquisition of Merrill Lynch & Co. Banks have begun reporting dismal earnings, with J.P. Morgan Chase & Co. on Thursday saying it managed to earn a profit but that loan losses are rising. The current Treasury has made commitments in excess of the first half, making release of the second an imperative.
The Senate voted 52-42 to defeat a "resolution of disapproval" designed to block release of the money. Both chambers needed to approve the resolution for it to succeed, rendering any House vote irrelevant. The total was closer than the 74-25 Senate vote cast last October that authorized the bailout, reflecting public anger over the program.
The Obama team hasn't detailed where it will direct the next $350 billion beyond foreclosure efforts. It is expected to continue purchasing equity in financial institutions and might also buy troubled assets clogging the financial system.
Mr. Obama is trying to turn public sentiment toward the financial bailout, which has become politically toxic in the hands of the Bush administration. Lawmakers and much of the public say they are upset at how the money has been spent and accounted for, and the lack of conditions placed on those receiving aid.
Lawrence Summers, Mr. Obama's pick to head the National Economic Council, said in a letter to Congress that healthy banks with good capital will be required to increase their lending and that Treasury will track such activity. Firms that receive money would also be precluded from using government funds to buy healthy firms instead of lending the money.
In a nod to concerns about how the bailout has expanded beyond financial firms to include the U.S. car business, Mr. Summers said the second half of the funds would be used to help prevent "systemic consequences in the financial and housing markets," not to implement an "industrial policy" that would aid various troubled industries. To assuage Republican concerns, the Obama team also agreed to provide additional support to the auto industry only "in the context of a comprehensive restructuring."
Those assurances, combined with a full-court press by Mr. Obama, helped convince lawmakers to release the money, including some Democrats who voted against the first iteration of the plan last year.
Sen. Debbie Stabenow of Michigan said she decided to support the release of the funds after speaking with Mr. Obama. "He has persuaded me that his administration will focus this where I believe it should have been originally, on jobs and housing," she said.
Sen. Bob Corker of Tennessee voted against release of the funds, after supporting the program last fall. "I'm very torn," he said later. He said he fears the new limits being considered for banks that receive aid are inadequate and that the funds may not be enough. "They're going to come back for more money."
Six Republicans voted to release the funds, while nine Democrats went the other way.
In the most significant break with the current administration, the Obama team plans to quickly implement a plan to help prevent foreclosures.
The incoming team hasn't yet settled on a particular policy. Options include forcing down interest rates, persuading lenders to cut borrowers' principal and using mortgage giants Fannie Mae and Freddie Mac, which are now controlled by the government, to jump-start the housing market.
The new administration is also considering a version of a proposal championed by Federal Deposit Insurance Corp. Chairman Sheila Bair to have the government share in the loss of any modified loan that falls into default.
The Obama team's main goal is to craft a plan that will reduce mortgage payments for borrowers struggling to pay their loans. It would likely extend to those who are struggling financially because of the recession, not only those whose homes are worth less than their mortgages.
In securing passage, the Obama team agreed to other conditions, too. Executive compensation above a certain level will have to be paid in restricted stock or another instrument that couldn't be sold until the government's investment was repaid. Similarly, all firms would have to get dividends approved by their primary federal regulator. Firms receiving "exceptional assistance" would have to limit their quarterly dividend payments to one cent a share until the government is repaid.
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