WASHINGTON  – The official in charge of the Treasury’s $700 billion bailout program for the financial sector warned Congress that the government should not force banks to make loans that bankers may deem risky.

Neel Kashkari, interim assistant secretary for financial stability at Treasury, told a congressional oversight panel Wednesday that bad lending practices were at the root of the financial crisis and cautioned Congress not to “micromanage” institutions that receive government funds.

“However well-intended, government officials are not positioned to make better commercial decisions than lenders in our communities,” he said.

Kashkari, who was put in the job under the Bush administration, testified amid growing impatience among members of Congress who want to see evidence that the taxpayer money is actually loosening credit markets.

Lawmakers on a subcommittee of the House Oversight and Reform Committee voiced frustration with what they said was a continued lack of clarity from the Treasury on how banks were spending money they have received under the Troubled Asset Relief Program. Under the program, the federal government has used more than $300 billion in taxpayer money to infuse financial institutions with cash, much of it by purchasing preferred stock and other assets.

Subcommittee chairman Dennis Kucinich, D-Ohio, complained that at least three financial institutions that have received TARP money – Citigroup Inc., Bank of America Corp., and J.P. Morgan Chase and Co. – have made foreign investments.

“If the banking system is in serious enough trouble to require massive amounts of federal support, shouldn’t that federal support be channeled to the domestic economy?” Kucinich asked.

The misgivings were bipartisan.

“We don’t know if $300 billion has changed anyone’s behavior,” said Rep. Darrell Issa, R-Calif.

Kashkari said Treasury has used the TARP’s capital purchase program to invest an average of $16 million in 489 banks. He said the program was making about 30 new investments a week. At the same time, several banks have indicated a desire to pay back the federal funds early, citing the number of government restrictions that the Obama administration has attached to the capital injections and the
fear that other limits may be added.

WASHINGTON  – Treasury Secretary Timothy Geithner said Tuesday the new administration will wage an aggressive two-front battle against the worst financial crisis in seven decades, while the Federal Reserve announced it was expanding a key lending program to up to $1 trillion.

But investors appeared to reject the government’s latest plan. The Dow Jones industrial average plunged more than 300 points in midday trading as financial stocks led the market lower, reflecting Wall Street’s growing concerns about the government’s ability to revive the banking industry.

The efforts were part of the government’s major overhaul of the widely criticized financial rescue program.

The Fed said it would expand the size of a key lending program to as much as $1 trillion from $200 billion. The program, which has yet to begin operations, is designed to boost resources for consumer credit and small business loans.

The Fed said the program would be expanded to cover the troubled commercial real estate market and certain residential mortgages.

“Right now critical parts of our financial system are damaged,” Geithner said. “Instead of catalyzing recovery, the financial system is working against recovery and that’s the dangerous dynamic we need to change.”

Geithner said the loss of 3 million jobs last year, and another 600,000 just last month underscored the urgency for government action.

“It is essential for every American to understand that the battle for economic recovery must be fought on two fronts,” Geithner said in a speech in Treasury’s ornate Cash Room where he unveiled the administration’s new plan.

“We have to both jump-start job creation and private investment and we must get credit flowing again to businesses and families,” he said.

RALEIGH, N.C. – Senator-elect Kay Hagan said Tuesday she’s looking at the possibility of replacing departing Sen. Elizabeth Dole on the committees that oversee the military and banking.

If she’s assigned to either committee, the freshman senator could play a key role in new regulations targeted at financial institutions and how the nation approaches the wars in Iraq and Afghanistan. Hagan has proposed new oversight of the banking industry and ending the war in Iraq to focus on Afghanistan.

Dole has sat on both panels, representing North Carolina’s large military installations and banking presence.

To begin her prep work, Hagan participated in three events geared toward veterans Tuesday. She attended a briefing at the State Fairgrounds with two of her future colleagues – North Carolina Reps. David Price and Bob Etheridge. She addressed the crowd and heard concerns from veterans struggling to get adequate care.

“In Washington, I’m going to work tirelessly to ensure that our veterans receive the care that you deserve, including access to higher education and quality and affordable health care,” Hagan said before heading to her hometown of Greensboro to meet with more veterans. She only took a few questions from reporters before leaving. Her staff did not return messages seeking additional comment about her plans.

Dole played a role in those issues when the Congress passed a new GI Bill this past year. Dole helped persuade congressional leaders to include a provision proposed by Republicans that would allow veterans to transfer the educational benefits to other members of their family.

WASHINGTON – Nearly 20 years of John McCain’s contrition over his role in a 1980s banking scandal vanished this week in 17 minutes and 30 seconds.

It took that long for John Dowd, McCain’s lawyer in the Keating Five investigation, to make the mea culpas disappear in a telephone conference call with reporters.

Dowd said Monday the Arizona senator, now the Republican presidential nominee, was the victim of “a classic political smear job” and a “cheap shot” by Democrats who investigated him. The lawyer said the Democratic chairman of the Senate ethics committee during the investigation was a “stooge” of his leadership.
 
When a reporter pointed out that Dowd’s comments seemed at odds with McCain’s history of contriteness, Dowd blew right through the trap – in a way that allows McCain to offer new mea culpas in the future.

“I’m his lawyer and I have a different view of it,” Dowd said. “I understand why John feels the way he does. He feels this was an embarrassing and humiliating matter.”

The “matter” was the committee’s investigation of four Democratic senators and Republican McCain, which ended in 1991.

All had accepted contributions from Charles Keating Jr., a real estate speculator and savings and loan owner who became the national symbol of greedy thrift owners. Keating’s Lincoln Savings and Loan was among many institutions that failed, and the uninsured financial products he sold cost many investors their life savings.

McCain and Keating – whose real estate company was in McCain’s home state of Arizona – were social friends and political allies. McCain raked in $112,000 from Keating, his family and associates in his early campaigns. The senator and his family – and even his daughter’s baby sitter – flew in Keating’s company plane to the Bahamas and elsewhere.
 
In the events that triggered the Senate investigation, McCain and the other senators took up Keating’s cause with financial regulators in 1987 as they were investigating the businessman and referring possible criminal charges to the Justice Department. Keating eventually went to prison for financial wrongdoing.

An embarrassed McCain repaid $112,000 to the U.S. Treasury and reimbursed Keating for all the trips. The senator said he believed that Keating had previously been reimbursed for the trips, but he had not been.

McCain clearly was shaken by the experience.

During an interview with a reporter during the inquiry, the senator paced back and forth in his office, his step quickening as his anger rose. He was furious about Keating, a one-time friend who had called the decorated Vietnam POW a wimp for not doing more to get financial regulators off his back.

McCain also was furious at himself for walking into a scandal that almost sank his career.

Fast forward 20 years. Dowd’s news conference was part of a nasty exchange with Democratic rival Barack Obama’s campaign over the character of the two candidates. His tone was nothing like McCain’s writings in his 2002 book, “Worth The Fighting For.”

McCain wrote that he learned many lessons from the Keating case, “And I’ve never forgotten a single one of them.”

“I refrained from ever intervening in the regulatory decisions of the federal government if such intervention could be construed, rightly or wrongly, as done solely or primarily for the benefit of a major financial supporter of my campaigns,” he wrote.
 
He vowed to always be “an honest servant of the public interest.”
  
His attendance at two meetings with banking regulators was “the worst mistake of my life,” McCain wrote.

He became the Senate’s leader in reforming the way campaigns are financed.

Some of Dowd’s comments Monday were only partially true.

-”The Senate committee cleared him completely,” Dowd said.
      In fact, the investigation ended with a rebuke that McCain “exercised poor judgment in intervening with the regulators.” But the committee also determined McCain’s actions “were not improper nor attended with gross negligence.” Also, the committee concluded there was a “decent interval” of more than a year between the last contributions Keating raised for McCain and his attendance at the meetings with financial regulators.

-”Senator (George) Mitchell (D-Maine) was the majority leader and Howell Heflin (D-Ala., the ethics committee chairman) was his stooge and he was doing what he was told because the rest were Democrats in the hearing,” Dowd said.
      That’s strong language against the one-time chief justice of the Alabama Supreme Court, who died in 2005. However, Dowd does have a political point.

The special counsel for the committee, Robert Bennett, had recommended – based on the evidence – that McCain and a Democrat senator, John Glenn, be dropped as defendants. Democrats kept McCain in the case because they didn’t want their party to shoulder all the blame for savings and loan failures.

Republicans then refused to drop Glenn. The committee was composed of three members from each party. It was a stalemate, and all five remained in the case to the end.

WASHINGTON-When Bush administration officials came to Capitol Hill earlier this week to make the case for a buyout of bad mortgage debt, Sen. Elizabeth Dole said she was skeptical of the plan. Then she looked backwards.

In 2003, Dole began sponsoring legislation to beef up weak government oversight of two key players in the housing market – Fannie Mae and Freddie Mac – warning that failure to fix the mortgage giants could lead to problems.

That prediction proved accurate. The government was forced to take over the two firms this summer, shortly after the passage of provisions Dole had been pushing for five years.

“This problem could have been resolved years ago,” Dole, R-N.C., told Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke at a hearing of the Senate banking committee Tuesday.

Over the last six years, Dole’s membership on the committee gave her a voice on a host of debates related to the current crisis, from the regulation of mortgage giants, to oversight of Wall Street investment banks and hedge funds and monetary policy.

With Congress mulling over a proposal to buy $700 billion worth of Wall Street securities linked to bad mortgages, many are now asking whether Congress and the administration did enough to prevent the current financial woes.

Dole’s role on the banking committee has come up as an issue in her bid for re-election against Democratic state Sen. Kay Hagan.

A review of committee hearing transcripts and bills Dole sponsored during her tenure show she was an early and sometimes lonely advocate for beefing up oversight of Fannie Mae and Freddie Mac, even after a series of accounting scandals revealed deep problems at both firms.

Financial analysts and economists say a lax regulatory environment helped the firms conceal substantial problems created by their purchase of massive quantities of risky subprime loans, a flaw that has hurt the broader economy.

The review of hearing transcripts and legislation she sponsored during her first term also suggests that Dole was more engaged in the mortgage giants’ troubles than she was in a host of other issues that analysts and economists say also contributed to the current woes.

A review of committee hearing transcripts shows Dole did not attend or did not speak- the transcripts do not make clear which – at several banking committee hearings during her first term.
The hearings covered banking and hedge fund regulation, oversight of Wall Street, problems in the subprime mortgage market, foreclosure prevention, and a few included discussions with the Federal Reserve chairman on economic issues.

Hagan’s campaign says her “silence” in those committee hearings shows a lack of commitment to those issues. But Dan McLagan, a spokesman for Dole’s campaign, suggested that argument reflected an overly
simplistic view of the way Washington works.

“There are a lot of ways for a senator to influence regulatory policy and Sen. Dole takes advantages of many of those different options. Depending on the issue, raising it in committee may not be the most effective way of making change,” he said.

Fannie Mae and Freddie Mac have been key players in the housing market for decades. They buy mortgages from banks, package the mortgages together as securities, and sell them to investors or keep them on their own books.

Until a few years ago, the firms mainly bought mortgages that banks issued to the safest borrowers. But a few years ago, they expanded into the growing market for subprime mortgages. Their presence helped make it easier for many Americans to get loans – and drive housing prices up by bringing more buyers into the market.

The firms were private, but long operated with an implicit bailout guarantee from the federal government.
Because of that guarantee, Dole and a handful of Republican senators introduced legislation on several occasions to allow federal regulators to take a closer look at Fannie’s and Freddie’s books. The legislation gave regulators the power to force the companies to reduce risk by decreasing the number of securities tied to subprime mortgages in their portfolios and to require the companies increase the amount of money kept on hand to cover bad bets on subprime mortgages.

Both led to financial problems for the companies that led to the government takeover.

For years, the legislation went nowhere, though Dole and others raised the issue repeatedly in banking committee hearings.

“We need it now,” she said at a hearing in 2006. Many of those provisions passed this year, just in time for the government to take over the companies.

Senate Republicans have blamed Democrats for resisting the measure both before and after Congress changed hands in 2006. But Colleen Flanagan, a spokeswoman for Hagan, said that Dole’s failure to get it passed showed she was not an effective voice on the banking committee.

“She can sign her name on bills until she’s blue in the face, but if they didn’t go anywhere…it’s really no different than total inaction,” she said.

McLagan said the senator did everything she could to get it passed in the face of intense lobbying from the two mortgage firms.

“On what I think is universally seen as the major tipping point of the current crisis, Freddie and Fannie, she talked about it with regulators, staff, members of the administration, and used all private and public venues up to and including brining it up in committee hearings,” he said.

Fannie and Freddie sold many of the subprime backed loans to Wall Street investment banks, including many of the larger firms that have collapsed in recent months.

But whether the collapse of Fannie and Freddie was the major tipping point of the crisis is open to debate, financial experts say. The current problems had many fathers, including some unrelated to mortgages. They include lax oversight of investment banks and hedge funds, and the emergence of complicated financial instruments that, in hindsight, failed to accurately account for risks firms were taking in non-mortgage lending.

“If Fannie and Freddie had not failed, I think we’d still have a financial crisis. That wasn’t the primary trigger,” said Rob Bliss, an expert in financial markets and a professor of business at Wake Forest University.