WASHINGTON — When he takes office in January, President-elect Barack Obama will have wide latitude to rework the patchwork of programs the Bush administration has designed to stabilize the financial system.
On the list of potential changes: tougher terms for companies accepting government capital, a U-turn on buying troubled assets, and moves to bulk up Fannie Mae and Freddie Mac.
The Obama administration is also expected to launch some initiatives of its own, such as a more aggressive approach to modifying mortgages so borrowers can avoid foreclosure.
"Given the flexibility that the law gives to the management" of the Troubled Asset Relief Program, "the Obama team will have significant ability to tailor their own approach," said Peter Peyser, a principal at Blank Rome Government Relations LLP.
Ken Bentsen, a former Democratic congressman from Texas who is now the president of the Equipment Leasing and Finance Association, agreed that the Obama administration will not be bound by the decisions of the current one.
"I don't think it's a situation where one could say, 'Well, the die is cast from the Bush administration, and you have to carry out everything the way it's set up,' " he said.
No one expects the Obama administration to undo the $250 billion to be invested in financial companies, but it is possible that new strings will be attached.
Democratic lawmakers have been pushing the Bush administration to add restrictions on how the money may be used. Several Senate Banking Committee members argued last week that the capital should not be used to finance acquisitions, and that the government should compel recipients to use it for lending programs.
Whether an Obama administration would do so is unclear, but the government has already renegotiated the terms of other bailout plans. American International Group Inc. was initially given a $85 billion loan, but the terms and amount were reworked last week.
"As we've seen with AIG, the terms of a bailout package can change over time, and there's potential that the government could go back to the institutions and restructure whatever was given to them," Mr. Peyser said.
Though the Treasury has committed 40% of the $700 billion it was given by Congress on Oct. 3, the rest is available for the Obama administration.
There is an opportunity "to take a further look at how to utilize the Tarp legislation," said V. Gerard Comizio, a partner at Paul, Hastings, Janofsky & Walker LLP.
One obvious way the new administration could change course would be to invest Tarp funds in the Big Three automakers. The chief executives of these companies have lobbied Congress for aid, and the president-elect raised the issue with the president in a meeting last week.
"The real question is how much of the remaining amount will be used for large purchases and … the auto industry," Mr. Comizio said.
President-elect Obama could also reverse Treasury Secretary Henry Paulson's announcement last week that Tarp money would not be used to buy troubled assets, as the Treasury Department had originally recommended.
"That is still an option," said Bert Ely, an independent analyst in Alexandria, Va. "They may decide to do something completely different under the guise of asset purchases. It's a new administration, and as long as they're working within the parameters of the legislation, they're fine."
The Obama administration may also use the money for a plan promoted by Federal Deposit Insurance Corp. Chairman Sheila Bair, which would let lenders receive guarantees if they agree to a systemic, government-created modification program. (See related story.) Though the White House nixed the idea, Democrats have repeatedly endorsed it.
"Assuming the problem is still as serious as it is today with foreclosures and people losing their homes, I think the new administration would give serious consideration to her proposal," said Ron Glancz, a partner at Venable LLP. "Her program goes right down to the consumer level. That's something that might be appealing to them."
The new administration may have the most freedom in steering the future of Fannie and Freddie, which the government seized Sept. 7. President-elect Obama is likely to install a Democratic ally atop the Federal Housing Finance Agency, who may be less interested in shrinking the government-sponsored enterprises.
"Fannie and Freddie could very well be the centerpiece of the administration's efforts to restore the residential housing market to sanity," said Gil Schwartz, a partner at Schwartz & Ballen LLP. "If they decide to go that route, it seems they'll be putting a lot of emphasis on promoting Fannie's and Freddie's facilities, not cutting them off."
The Bush administration has been particularly concerned with the size of their mortgage portfolios. When the GSEs were put into conservatorship, Mr. Paulson said that their portfolios would shrink by about 10% a year. Other administration officials have said the portfolios could ultimately shrivel to $250 billion each, from their current levels of roughly $800 billion.
"There's a significant amount of leeway with Fannie and Freddie to put an Obama administration stamp on the role those two organizations can play," Mr. Peyser said. "They each have their own issues with their portfolios, but there is potential under their restructuring that they can play an important role in whatever policies the Obama administration may adopt."
The government has also introduced a host of other programs, including a hike in the deposit insurance cap, a guarantee of bank debt, backing for money market mutual funds, and numerous liquidity initiatives. Most of these measures have sunset dates, and the new administration could determine whether they are discontinued or extended.
The growing number of government initiatives has led to considerable consternation that too much has been left on President-elect Obama's doorstep to clean up.
"It's awkward," House Financial Services Committee Chairman Barney Frank said last week. "It's not fair to the president to foist this all directly on him."
The Bush administration and banking regulators have been roundly criticized in recent months for solving each problem on a case-by-case basis, instead of attacking the underlying causes of the financial crisis.
But Mr. Peyser said that will provide the Obama administration with a lot of room to maneuver.
"If the Bush administration were to have laid out a long-term strategy during this period, it would have made the Obama administration's challenges even more difficult," he said. "They've left flexibility to the incoming administration to set their own strategic framework."