April 1 (Bloomberg) -- President Barack Obama’s administration should be more forceful in dealing with banks and U.S. automakers, said former Treasury Secretary James Baker.

“They should be more aggressive in terms of the financial institutions,” Baker, 78, said on Bloomberg Television’s “Conversations with Judy Woodruff” airing today. Some form of pre-arranged bankruptcy is “what should have happened with the automobile industry.”

The Obama administration is betting it can revive the U.S. banking system without resorting to outright nationalization through a Public-Private Investment Program that will be used to purchase toxic assets. Baker, who ran the Treasury from 1985 to 1988, said the government should be looking to temporarily take over “needy” banks.

Banks that are deemed to be “needy” should be infused with government money “just long enough to clean them out, get the bad paper out of there,” Baker said. “But only so long as was necessary to get them back into the private sector.”

Banks and financial institutions worldwide have reported more than $1.2 trillion in credit losses and writedowns. Many of those losses stemmed from mortgage-related investments that declined with the collapse in the U.S. housing market.

Fed’s Balance Sheet

Responding to the crisis, the Federal Reserve has more than doubled its balance sheet to $2.1 trillion while pledging to finance a $1 trillion consumer-loan program and to buy more than $1 trillion of mortgage debt and $300 billion of Treasuries.

“I think the Fed has done everything that it should do,” Baker said.

Timothy Geithner, the current Treasury secretary, proposed a strategy last week to remove toxic assets from the books of the nation’s banks. Geithner’s plan is aimed at financing as much as $1 trillion in purchases of illiquid real-estate assets, using $75 billion to $100 billion of the Treasury’s remaining bank-rescue funds.

Obama believes a quick, negotiated bankruptcy is the most likely way for General Motors Corp. to restructure and become a competitive automaker, people familiar with the matter said.

Obama also is prepared to let Chrysler LLC go bankrupt and be sold off piecemeal if the third-largest U.S. automaker can’t form an alliance with Fiat SpA, said members of Congress who were briefed on the GM and Chrysler situation before the president said two days ago that the automakers’ viability plans were insufficient.

Baker said some form of pre-arranged bankruptcy for U.S. automakers “will enable these companies to survive.”

‘Pre-Arranged Bankruptcy’

“Maybe a reorganization or a pre-arranged bankruptcy -- an agreed-type approach where you get rid of a lot of the obligations that keep them from being competitive,” he said.

The U.S. dollar would continue to be the world’s reserve currency, Baker said.

Geithner sent the dollar tumbling last week after suggesting that the U.S. would be open to China’s proposal for an international reserve currency instead of the dollar. After he clarified his remarks 15 minutes later, the U.S. currency recouped some of its losses.

China is the largest foreign holder of U.S. Treasuries, and Premier Wen Jiabao last month expressed concern about the value of its investment. Central bank Governor Zhou Xiaochuan this week advocated a “super-sovereign reserve currency” that’s disconnected from any individual nation.

“In times of crisis, people flee to the dollar,” Baker said. “They flee to the dollar because of the size of our economy, because of the strength of our country and because of the political stability of our system.”

To contact the reporter on this story: Michael Dwyer in Singapore at Mdwyer5@bloomberg.net

Last Updated: April 1, 2009 05:00 EDT