Jan. 13 (Bloomberg) -- Barack Obama will order the Treasury Department to limit executive compensation and dividend payments by financial institutions that get “exceptional assistance” from the financial rescue fund, Larry Summers, a top economic adviser to the president-elect, told Congress.

Summers sent a letter to congressional leaders yesterday outlining the conditions that Obama supports in tapping the second half of the $700 billion Troubled Asset Relief Program.

“Those receiving exceptional assistance will be subject to tough but sensible conditions that limit executive compensation until taxpayer money is paid back, ban dividend payments beyond de minimis amounts, and put limits on stock buybacks and the acquisition of already financially strong companies,” he wrote.

Obama wants more of the money funneled to community banks and small businesses, as well as steps to loosen credit for individuals and help for homeowners facing foreclosure, said Summers, picked by Obama to head the White House National Economic Council. He also wants greater oversight of the aid program and a public accounting of how the money is spent.

Obama, who takes office on Jan. 20, called President George W. Bush yesterday to request that he formally ask Congress to release the remaining TARP funds. The president-elect said he wanted the money available soon after he’s sworn in as “ammunition” in event of an economic emergency. Bush sent the formal notification to Congress last night.

Bush Request

The request, contained in an 18-page report, triggers a 15- day period when Congress can vote to deny the release. Senate Majority Leader Harry Reid of Nevada said today his chamber must take a vote by Jan. 18.

The request for funds comes as Obama’s aides draft plans for broadening the program beyond the Bush administration’s focus on buying stakes in banks and imposition of restrictions and accountability standards.

The changes, being coordinated with the Democratic majority in Congress, will include initiatives to stem mortgage foreclosures and direct more money to community banks and small businesses.

“President-elect Obama believes there has been too little transparency and accountability; too much upside for financial institutions and executives who acted irresponsibly without providing enough help for small-business owners, families who are struggling to keep their jobs and make ends meet, and innocent homeowners,” Summers wrote in his letter.

He said the incoming administration will work with Congress to institute tougher accountability standards for the program, work to overhaul bankruptcy laws, and “impose tough and transparent conditions on firms receiving taxpayer assistance.”

‘Fundamentally Change’

Obama said yesterday in Washington that he wants to “fundamentally change” the way the TARP has been administered. He criticized the Bush administration for the way the bailout has been handled.

“I think many of us have been disappointed” with the lack of oversight in using the first $350 billion of the fund and the “failure to take bold action with respect to areas like housing, consumer credit,” he said.

He also said he “felt that it would be irresponsible for me, with the first $350 billion already spent, to enter into the administration without any potential ammunition should there be some sort of emergency or weakening of the financial system.”

House Financial Service Committee Chairman Barney Frank has been consulting with Obama’s advisers on legislation that would enact some of the limits and restrictions outlined by Summers.

“We should not allow our disappointment at the Bush administration’s poor handling of the TARP program to prevent the Obama administration from using the funds in more appropriate ways,” Frank said in a statement.

‘Some Doubt’

In an interview yesterday with Bloomberg Television, Frank said there is “some doubt” Congress will approve legislation setting the terms for releasing the second $350 billion.

“There’s a great deal of anger in the country” over the way the funds were handled, the Massachusetts Democrat said.

The House of Representatives will vote on Frank’s proposal this week, he said. Failure to approve the plan could have a “negative” impact on markets, Frank said.

House Speaker Nancy Pelosi, a Democrat of California, and Senate Majority Leader Harry Reid, a Nevada Democrat, said the statements by Obama and his advisers will help clear the way for the money to be released.

House Republican Leader John Boehner of Ohio said he will vote against releasing more funds because there still isn’t a thought-out “exit strategy” for government investment in the private sector.

‘Irresponsible’

Until then, “it would be irresponsible for Congress to release the remainder of these resources,” Boehner said in a statement.

The action on TARP came after Bush, during what he said would be his last news conference before leaving office, told reporters he hadn’t gotten a request from Obama concerning release of the funds. “I told him that, if he felt he needed the $350 billion, I would ask for it,” Bush said.

The news conference ended at 10:04 a.m. yesterday. White House press secretary Dana Perino said the call from Obama making the request came at 10:25 a.m. The letter from Summers was released two hours later.

Michigan Senator Carl Levin said yesterday the Treasury Department has agreed to give Congress copies of the contracts signed by Citigroup Inc., JPMorgan Chase & Co., Bank of America Corp., Goldman Sachs Group Inc., Morgan Stanley and five other companies that got capital injections from the $700 billion bank bailout fund.

Levin, a Democrat and chairman of the Permanent Subcommittee on Investigations, said the decision averts a showdown with his panel. He had threatened to subpoena the records.

Treasury also agreed to provide contracts signed by insurer American International Group Inc., Merrill Lynch & Co., State Street Corp., Wells Fargo & Co. and Bank of New York Mellon Corp., Levin said in a statement.

To contact the reporters on this story: Julianna Goldman in Washington at jgoldman6@bloomberg.net; Holly Rosenkrantz in Washington at hrosenkrantz@bloomberg.net.

Last Updated: January 13, 2009 10:59 EST