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Obama advisor warns banks on the price of more aid

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President-elect Barack Obama‘s top economic advisor, Larry Summers, gave another verbal lashing to the nation’s banks in a TV appearance Sunday.

The second half of the $700-billion bank bailout fund, Summers said on CBS’ ‘Face the Nation,’ will come with more strings attached for lenders -- something he and others in the new administration, and in Congress, already had signaled -- because of disappointment with the industry’s response to government help so far.

From Bloomberg News:

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‘The focus isn’t going to be on the needs of banks; it’s going to be on the needs of the economy for credit,’ Summers said. Obama’s team will manage the Troubled Asset Relief Program ‘in a very different way,’ he said. Summers’ remarks indicate that banks and their executives face tougher scrutiny in seeking money from the bailout after the Obama administration takes office. The TARP may be redirected to address ‘housing to prevent foreclosures,’ ‘automobile loans, consumer credits, small business, municipalities,’ he said. Summers said banks will be subject to more oversight in their use of the funds. ‘What’s not going to happen is the funds that could be supporting increased lending are going to be used to finance acquisitions that may serve a bank but don’t serve the country,’ Summers said. The new administration will also prevent banks that accept government funds from pursuing acquisitions to the detriment of increasing lending, he said.

Summers is saying what taxpayers want to hear. But with bank shares diving anew this year, his comments may just give investors another excuse to flee the stocks, fearing what the government may demand from the companies. If private investors give up on the banks, nationalization will become a fait accompli.

As I wrote here Saturday, the Obama administration also seems poised to try a new approach to fixing the banks, potentially by having the government take bad loans off lenders’ books once and for all. That was the original idea behind TARP last October, until outgoing Treasury Secretary Henry M. Paulson shifted the program in favor of direct capital injections.

Britain appears to be heading in a similar direction: Treasury chief Alistair Darling today is expected to announce a new phase of that nation’s bank bailout program, including government insurance of toxic assets the lenders hold, the Associated Press reports.

Darling also will demand guarantees that banks getting government help will boost lending. From AP:

The chancellor told Sky News television that banks would have to ‘enter into binding agreements to make sure that, if we put additional money into the system, it goes to the people and businesses it is designed to support.’

-- Tom Petruno

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