April 14 (Bloomberg) -- Fannie Mae Chief Executive Officer Herb Allison is the leading candidate to run the Treasury office overseeing the $700 billion U.S. bank-rescue program, according to a person familiar with the matter.

Allison, who spent three decades on Wall Street, would replace Neel Kashkari, a holdover from the Bush administration, as assistant secretary for the Office of Financial Stability. The unit administers the Troubled Asset Relief Program, created last year to stave off a collapse of the financial system.

Treasury Secretary Timothy Geithner would rely on the 65- year-old Allison to implement the public-private partnerships aimed at cleansing toxic assets from lenders’ balance sheets. He may also have to help convince Congress to provide additional money should regulators determine that banks don’t have enough capital to survive the recession.

“Perhaps the biggest challenge for Mr. Allison will be determining how best to use the TARP for what Congress intended -- troubled asset relief,” said Kevin Petrasic, a banking lawyer at Paul, Hastings, Janofsky & Walker in Washington. “At this point, a good plan is better than a perfect plan, otherwise we could lose the opportunity to deal with these assets for a long time to come.”

Under former Treasury Secretary Henry Paulson, the rescue focused on providing capital to banks, though billions of dollars were also spent propping up General Motors Corp. and Chrysler LLC, and rescuing American International Group Inc.

Animosity in Congress

Paulson sold the TARP program to lawmakers as a way of ridding bad loans from balance sheets and enabling banks to increase lending. He soon abandoned the plan in favor of equity investments. Paulson’s U-turn, along with bonuses paid to managers at bailed out firms, fostered hostility in Congress toward the rescue program.

Goldman Sachs Group Inc. said yesterday that it plans to raise $5 billion to repay TARP funds after posting profit that exceeded the most optimistic Wall Street estimates. The New York-based bank said it will use proceeds from a common stock offering plus “additional resources” to redeem the $10 billion it got from the program.

Geithner has had a difficult time filling vacancies at the Treasury and remains President Barack Obama’s only confirmed appointment at the department as it grapples with the biggest financial crisis since the Great Depression. Frank Brosens, a hedge fund manager who was Geithner’s first choice to run the TARP office, withdrew from consideration last month.

Political Risks

If nominated, Allison will take over a job fraught with political risks for the Obama administration. One of Allison’s early tasks could be negotiating with Congress over additional funds for the bailout. Obama’s aides have indicated extra cash is necessary, though there is little appetite on Capitol Hill where lawmakers of both parties have said they won’t support additional funds to aid Wall Street.

Allison’s appointment would also create vacancies at both Fannie and its sister company Freddie Mac, which were seized by the government in September and are now playing key roles in Obama’s plans to revive the housing industry. Freddie Mac CEO David Moffett unexpectedly quit last month.

Michael Williams, Fannie’s chief operating officer, is likely to be named its CEO, at least on an interim basis, according to a person familiar with the company who declined to be identified because no decision has been announced.

Allison, who served as national finance chairman on John McCain’s unsuccessful 2000 presidential campaign, headed New York-based Teachers Insurance and Annuity Association - College Retirement Equity Fund for five years.

TIAA-CREF’s Assets

Allison created TIAA-CREF’s wealth-management division and increased its total assets by 68 percent to $435 billion at the end of 2007 as the company stepped up marketing to investors beyond its base. He faced criticism from clients for bringing Wall Street practices, including job cuts and higher fees, to an institution that manages savings for teachers and academics.

A philosophy major at Yale, Allison spent 28 years at New York-based Merrill Lynch & Co., rising from a junior employee to president and chief operating officer. He quit in 1999 after losing out on getting the top job to David Komansky.

The Treasury is still operating with less than a full complement of top officials, though Obama has moved to fill several posts at the department.

The White House last month said it would nominate Neal Wolin to be Geithner’s deputy secretary, and Lael Brainard to be the undersecretary for international affairs. Stuart Levey is staying on as the Treasury’s undersecretary for terrorism and financial intelligence.

Geithner has relied on a team of unconfirmed counselors and officials detailed from other agencies as he crafted major policies to spur an economic recovery.

To contact the reporters on this story: Robert Schmidt in Washington at rschmidt5@bloomberg.net; Scott Lanman in Washington at slanman@bloomberg.net.

Last Updated: April 14, 2009 11:12 EDT