Treasury sees TARP funds for financial sector

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By Glenn Somerville

WASHINGTON (Reuters) - The Treasury Department maintains that a $700-billion bailout fund approved by Congress is best used in trying to stabilize the nation's troubled financial sector and a spokeswoman indicated on Thursday night that was unlikely to change.

After the U.S. Senate failed late on Thursday night to reach a last-ditch compromise to help troubled U.S. automakers with $14 billion in bridge loans, calls swelled for Treasury to tap its so-called TARP, or Troubled Asset Relief Program, funds to help the auto industry.

"I'd be shocked if the administration didn't dip into TARP," an unidentified senior Democratic aide said. "That is the only option now to keep these companies afloat."

Republican Sen. Christopher Bond of Missouri told reporters he had "reason to believe" that the White House would consider using the TARP program to help General Motors, Chrysler and Ford Motor Co.

GM and Chrysler have said they urgently need billions of dollars to pay their bills in the next few weeks. Ford, which is in stronger financial condition, is asking for a line of credit to be tapped if its finances worsen more than expected in 2009.

But to date there has been no indication from Treasury Secretary Henry Paulson that he is prepared to redirect the TARP money to prop up ailing industrial companies.

During a visit to China last week, Paulson told reporters that a failure of a major auto company "would not be a good thing" amid current economic distress and said he hoped Congress would "prove successful in addressing this issue."

POSITION UNCHANGED

But Paulson made clear then that he felt TARP funds were intended to help right the U.S. financial services sector. Soon after the Senate bill collapsed on Thursday night, a Treasury spokeswoman said that position was unchanged.

For weeks, House Speaker Nancy Pelosi, a California Democrat, has repeatedly urged the Bush administration to use TARP money to help automakers. The White House disagreed, saying Congress should tap an existing Energy Department technology program for any funding needed by Detroit.

The head of the Government Accountability Office testified earlier this month that another option was to require U.S. banks receiving TARP money to lend some of it to automakers. "It's an idea that should be explored," said Gene Dodaro, the acting head of Congress' investigative arm.

Half, or $350 billion of the $700 billion authorized by Congress in October for TARP, has been drawn down but Treasury has not specified whether it intends to request access to the remaining money before the Bush administration leaves office in January.

Many lawmakers have criticized the use of TARP money by participating banks, saying that they have hoarded the money and not done enough to unfreeze credit for consumers and businesses. And the Treasury Department has also been criticized for not yet deciding if it will impose reporting requirements on banks so that the government can monitor how taxpayer money is used.

In Beijing, Paulson said: "The very clear purpose of the TARP was to deal with the stability of our financial system. "That I believe is the right focus of the TARP."

He added that it was "very important to retain that capacity and those resources" in TARP to help the financial services sector.

(Editing by Eric Walsh)

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