Obama team, Rep. Frank eye bailout fund overhaul

WASHINGTON (Reuters) President-elect Barack Obama and a key Democratic lawmaker revealed plans on Friday to overhaul the government's $700 billion financial rescue fund as a way to aid struggling homeowners and speed the flow of credit.

An Obama transition official on Friday confirmed that the new administration planned a broader approach for the second $350 billion of the U.S. Treasury's Troubled Asset Relief Program. Some money would be aimed at stemming record foreclosures and helping cash-strapped local governments, which have been forced to cut staff and services.

U.S. Rep. Barney Frank, chairman of the House Financial Services Committee, said he was planning to require money be devoted to housing. Aides said Frank's legislation, which would also tighten restrictions on the use of TARP funds by recipients, would demand about $40 billion for foreclosure relief. [nN09294312]

The efforts underscore growing dissatisfaction in Washington over the handling of the bailout fund by departing Treasury Secretary Henry Paulson.

Lawmakers have complained that his approach to devote the first half of the TARP money largely to recapitalize banks as a way to lessen the worst credit crisis in a generation has failed to slow soaring foreclosures.

"There's just no money that's gone in that direction. This one's not even arguable," Elizabeth Warren, the chairman of a TARP congressional oversight panel, told ABC News. "The TARP funds themselves have not been used in this way despite congressional statutes requiring them to do so."

A report from the panel on Friday also sharply criticized the Treasury's lack of oversight, saying there were "significant gaps in Treasury's monitoring of the use of taxpayer money," including failure to ask financial institutions to account for what they have done the funds.

Congress must give its blessing before the Treasury can dole out the remaining rescue funds and senior Democrats are talking with the George W. Bush administration about making a request as soon as this weekend, sources familiar with the talks said. If that request is approved in the next few days, the rescue cash could be available soon after Obama takes office on January 20.