Financial crisis will cost billions more, say Obama advisors

President Barack Obama’s closest economic advisors are signalling that the financial crisis will require more money and more US government intervention to correct.

Paul Volcker, chairman of the president’s Economic Recovery Advisory Board, told senators it was going to cost “lots more billions of dollars” to deal with the meltdown.

Earlier, treasury secretary Timothy Geithner said the government would have to do “substantially more” to address the crisis.

The blunt predictions came as the administration prepared to unveil a new framework for how to assist banks and other financial institutions with the unspent money in a $700bn (€545bn) financial bailout fund.

Congressional Democrats have warned the administration not to seek more bailout money.

The administration has not yet tipped its hand, but its options include direct capital infusions into banks, guarantees against losses on bad assets and a “bad bank” to buy distressed assets.

Citigroup and Bank of America provide an example of how the administration could proceed. Both banks received what the administration has called “exceptional assistance” that included taxpayer money from the Troubled Asset Relief Programme as well as guarantees against losses provided by the Federal Reserve Bank and the Federal Deposit Insurance Corporation.

By using the Fed and the FDIC, the administration did not have to ask Congress for extra money.

Last month, the Senate reluctantly agreed to let Mr Obama have the €272bn left in the bailout fund.

The House of Representatives, in a symbolic step, voted against releasing the money, but Mr Obama needed only one chamber to side with him to get access to the funds.

Since then, key Democrats such as Senate banking committee chairman Christopher Dodd and Rep Barney Frank, chairman of the House Financial Services Committee, have warned the administration that Congress is in no mood to give it more.

“Until they are successful in showing the average American that the money is being used reasonably, there’s no point in asking for it, because they won’t get it,” Mr Frank said on Tuesday.

Others have urged Mr Obama’s economic team to deal with bad financial assets by guaranteeing them against losses instead of buying them outright.