Treasury's Kashkari eyes TARP contingency funds

WASHINGTON (Reuters) - Thousands of U.S. banks are waiting for federal investment dollars, but the Obama administration needs to set aside cash for "one-off" rescues of major institutions, the man who runs the Treasury's $700 billion bailout fund said on Tuesday.

Neel Kashkari, who will stay on for several more weeks as the administrator of the Troubled Asset Relief Program (TARP) said the program should stay focused on shoring up the financial sector.

The Bush administration has requested that Congress release the second $350 billion in funding for the program to give President-elect Barack Obama a head start in dealing with financial system stress.

Speaking to students at Georgetown University's McDonough School of Business, Kashkari said his phone has been "ringing off the hook" from a wide range of companies, industries and municipalities seeking a piece of the aid money.

"We believe the TARP should be focused on the financial system. It's designed for that, our programs are set up around that," Kashkari said. "And we think if there are contingencies for other industries that those are best dealt with in legislation specifically geared toward those."

Congress can reject the TARP funding request and many lawmakers have said they want the next $350 billion to include aid to stem foreclosures and wider benefits for American consumers.

Obama's top economic adviser, Lawrence Summers, assured top lawmakers in a letter on Monday that the aid would get to smaller banks, businesses and municipalities and would help Americans buy cars or get college loans.

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Kashkari said the next phase of TARP funding could include a second round of capital investments into banks, which could be achieved by a matching program, under which the federal government matches private capital raisings.

But TARP needs to be able to deal with "systemically important" institutions, he said. The Treasury devoted about $85 billion of the first phase of TARP to shore up American International Group and Citigroup .

"It's impossible to predict what's going to happen. We hope that the actions that we've taken are sufficient, but we are also going to have enough dry powder on the side to deal with any one-offs that arise," Kashkari said.

Thus far, the Treasury has disbursed $265.3 billion of the first $350 billion to financial institutions and struggling Detroit automakers.

In addition to the Citigroup and AIG rescues, the Treasury has made capital investments in 257 banks totaling $189 billion, but thousands more institutions have applied for government cash through their federal regulators.

Kashkari said it will take time for the capital investments to have the desired effect of making credit more available.

The Treasury still has around $60 billion to invest in banks under TARP, before moving to the second $350 billion.

"There is a huge demand for the program. The number of applications under review at the regulators is in the thousands, representing every state in the country, and hundreds more have already been pre-approved by Treasury," Kashkari said.

(Reporting by David Lawder; Editing by Andrea Ricci)