Obama Officials Struggle Over 'Bad Bank' Plan

Rep. Barney Frank (D.-Mass.), chairman of the powerful Financial Services Committee, has already introduced legislation to that effect and his views appear to have significant support among Congressional Democrats.

Some on the GOP side, notably Rep. Jeb Hensarling of Texas, who is a member of the TARP’s congressional oversight panel, are equally skeptical about the merits of massive government aid, partly because of its budgetary implications.

“What we are waiting for is a detailed report on how the second installment of the TARP will be spent and how is that going to unclog lending,” a senior Congressional staffer told CNBC.com Tuesday. “What greater accounting and transparency is there going to be and greater restrictions on CEO pay? Anything beyond that, bad bank, greater financial rescues, is secondary to Congressional Democrats getting confidence that things will be different than with the previous administration.”

There's speculation that Geithner will visit with the Democratic Congressional caucus at a retreat later this week in Williamsburg, Va. He met with Rep Frank Monday and discussed a wide range of issues, including TARP.

That may be all the more important in the current environment with the recent disclosures about large CEO bonuses and lavish spending.

Sherman says given all “the public anger over how TARP 1 [the first $350 billion] was spent," President Obama may essentially be “legally entitled to do anything he wants, as a practical political matter he’s got to assuage this huge political anger.”

In addition to new questions about the fate of the bad bank concept, there are emerging questions about the administration’s forthcoming new rules on executive compensation and loan transparency for firms getting government assistance.

At this point It appears the executive compensation terms will not be retroactive and only apply to firms that have received what is considered “exceptional” government assistance, as has been the case with AIG , Citigroup and to a lesser extent Bank of America.

Other measures might include making compensation packages more long-term performance-oriented, say based on years, rather than quarters, according to the source. In addition, the transparency measures may have more to do with reporting rules and their frequency than lending terms.

Rep. Sherman, for one, says he would consider such a concept. In general, he is somewhat skeptical about the government’s ability to effectively clamp down on executive pay unless it looks “at the whole compensation package” from salary to bonuses to stock options. He also says provisions might have to be made for executives to be rewarded after their government aid has been repaid.

He also doubts new rules on loan transparency will accomplish much in terms of determining whether banks are lending enough and to whom. “Money is fungible,” he says.

• Slideshow: Bank Failures of 2008

For these reasons and others, Sherman says making revisions to the TARP will be “very slippery.”

Nevertheless, it may be politically inescapable for President Obama, as the financial crisis and recession drag on while he pushes for a fiscal stimulus package that has drawn criticism because of social agenda components.

“While he is proposing constructive solutions, he also has to appeal to our most reptilian instincts and demonstrate someone is going to get punished,” says Eric Dezenhall, who runs a Washington-based consulting firm specializing in corporate damage control. “Spanking some of the oblivious CEOs even if it doesn’t solve the broader problem it does convey to the public some sense of how all of this is resonating emotionally.”

© 2012 CNBC.com

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