Jan. 26 (Bloomberg) -- President Barack Obama’s financial rescue plan will be unveiled soon and is likely to be larger and more ambitious than originally planned as the economy and banking system worsen.

The last procedural roadblock is set to be removed today, congressional Democrats said, when the Senate confirms Obama’s choice for Treasury secretary, Timothy Geithner, who will speed the rescue program out the door as soon as this week. Administration officials and members of Congress said yesterday the second $350 billion of the Troubled Asset Relief Program, released by Congress earlier this month, may not be enough to shore up lenders and pull the economy out of recession.

Lawrence Summers, director of the White House National Economic Council, said yesterday those funds would get the rescue plan started, while Vice President Joseph Biden and House Speaker Nancy Pelosi both said there may be a need for more money later.

“The president has made clear that our administration is going to be leaning forward, that we’re going to be proactive and that he is prepared to do what is necessary,” Summers said yesterday on NBC’s “Meet the Press.” “What ultimately will be necessary is something that will play out over time.”

More Funds

Appearing on the CBS program “Face the Nation,” Biden said Geithner, once confirmed, “will then report back to the president and me as to whether or not he thinks” the remaining TARP funds are sufficient.

Majority Leader Harry Reid last week said he wants the full Senate to consider Geithner’s nomination today around 6 p.m. His likely confirmation will be followed by nominations for other senior Treasury posts. Lee Sachs, an assistant secretary at the department in the Clinton administration is being considered for a top job, according to people familiar with the matter.

Gene Sperling, director of the National Economic Council in the Clinton White House, is also advising Geithner, said one of the people.

Obama’s plan will initially include between $50 billion and $100 billion for foreclosure-mitigation programs and an unspecified amount of money to stabilize undercapitalized banks to unlock the flow of credit to consumers and businesses, Summers said. He didn’t provide details of any other measures the administration is considering to help the banking system.

“We need to stabilize financial institutions,” Summers said. “Without a stable financial system, the economy can’t work.”

‘Very Different’

Summers, 54, said Obama intends to overhaul the $700 billion stabilization plan with a program that is “very different” than the one put in place by George W. Bush’s Treasury secretary, Henry Paulson, who was criticized for providing fresh capital to financial institutions without imposing tough conditions on how the money was spent.

“The priority is to get credit flowing again,” Summers said. “It’s going to emphasize transparency, it’s going to emphasize accountability.”

Banks need to lend more while maintaining sufficient capital, he said. “It wouldn’t be responsible for an institution that can’t maintain any confidence right now to raise its lending without having capital,” he said. “That’s why there needs to be more capital in the system.”

Forced Lending

Bank of America Corp. credit strategist Jeffrey Rosenberg said in a note to clients on Jan. 24 that forcing banks to lend may exacerbate the crisis.

“Mandated lending may lead to unintended consequences of expanding the bad-asset problem offsetting these short term benefits,” he said. “Simply put, throwing more credit at a problem whose root cause is too much credit cannot be a sustainable solution.”

Pelosi and North Dakota Senator Kent Conrad, the chairman of the Budget Committee, both said they foresee the need for another rescue bill. Conrad said no one knows how much money may ultimately be necessary to stabilize the system.

“If we’re just honest with people, we’re in uncharted territory,” Conrad said on CNN yesterday. “We’ve never been in a circumstance quite like this one before, where you have not only an economic slowdown, but the financial sector locking up.”

Conrad also said that if additional funds are needed, the administration should act sooner rather than later.

Reticent Congress

Getting additional money authorized by Congress will be a challenge. The initial $700 billion bill was unpopular with the public and it failed to pass its first vote in the House, even though it had the support of Bush and the Democratic leaders in Congress. Many taxpayers viewed the program as a bailout of the very same financial firms that caused the crisis.

Obama will need to act fast in the face of worsening economic conditions. U.S. employers slashed 2.6 million jobs last year, the most since 1945. Adding urgency to the discussions is the three-week slide in bank stocks. The Standard & Poor’s 500 Financials Index, which includes Citigroup Inc., Goldman Sachs Group Inc. and JPMorgan Chase & Co. fell for a third week.

In addition, the unemployment rate climbed to 7.2 percent in December, the highest in almost 16 years.

Gross domestic product probably contracted at a 5.5 percent annual rate from October through December, the biggest drop since 1982, according to the median estimate in a Bloomberg News survey ahead of Commerce Department figures due Jan. 30.

Credit Losses

U.S. banks are reluctant or unable to lend after suffering more than $700 billion in writedowns and credit losses since the collapse of the subprime-mortgage market in 2007. The slump in lending, even after the government has pumped billions into the nation’s banks, is exacerbating the downturn.

Administration officials are considering several options to shore up the banking system, including direct capital injections in exchange for equity stakes, a solution favored by the Bush administration.

The Federal Reserve and Federal Deposit Insurance Corp. are advocating a government-backed “aggregator bank” to remove hundreds of billions of dollars of troubled securities from the balance sheets of lenders. Officials are also considering insuring losses tied to toxic assets to boost confidence in banks’ underlying strength.

FDIC Chairman Sheila Bair has said that cash from the Troubled Asset Relief Program could help capitalize the so- called bad bank and that commercial lenders may kick in some money of their own. One possibility that has been discussed is issuing banks some kind of stock in the new organization in return for their impaired assets.

Ownership Stakes

In any new rescue efforts, the Treasury is likely to continue to require banks to hand over ownership stakes to the government as a condition of receiving aid, though it will want to avoid outright nationalization. Programs so far have sought preferred shares and warrants, which can be converted into common stock and cashed out at the government’s request.

Under Paulson, Treasury went out of its way to avoid taking a controlling interest in the banks it has supported, preferring instead to use the warrants as a way to make sure taxpayers reap benefits of any stock-price recovery. However, regulators have taken stronger measures on occasion, such as the 79.9 percent stakes demanded last year of American International Group Inc. and mortgage companies Fannie Mae and Freddie Mac.

‘Increased Investment’

Pelosi said if U.S. banks get an “increased investment” it will be accompanied by a stronger government presence.

“If we are going to put money into the banks, we certainly want equity for the American people,” said Pelosi, a California Democrat. “If we are strengthening them, then the American people should get some of the upside of that strengthening. Some people call that nationalization; I’m not talking about total ownership, but we’re just saying.”

Geithner said any banks getting aid from the government will also have to do a better job of reporting how they are using the funds.

“We will measure, monitor and track the impact of the program on lending and access to credit,” Geithner said in written answers to questions from Senator Carl Levin after his confirmation hearing. “Going forward, as a condition of federal assistance under this program, healthy banks without major capital shortfalls will be required to increase lending above baseline levels.”

Some analysts said a new program by the Federal Deposit Insurance Corporation could help to fund the “bad banks.”

The agency said last week it will change its Temporary Liquidity Guarantee Program to insure some assets for 10 years, up from three years, to accommodate the longer maturities of covered bonds. The change, which the FDIC will put into effect this month, is part of a government effort to stabilize the banking system and increase consumer lending.

The aggregator banks could be set up as an independent agency that issues its own debt, said Lou Crandall, chief economist at Jersey City, New Jersey-based Wrightson ICAP.

“If the entity were incorporated as a bank, it might be eligible for the new 10-year covered bond guarantee program,” Crandall said.

To contact the reporters on this story: Alison Fitzgerald in Washington at afitzgerald2@bloomberg.net.

Last Updated: January 26, 2009 00:30 EST