White House says open to using TARP to ease debt

By Andy Sullivan

WASHINGTON (Reuters) - The Obama administration is weighing how a $700 billion financial rescue fund could be used to ease the U.S. debt burden, the White House budget director said on Thursday, as data showed the deficit had deepened.

"We're reorienting TARP towards assistance for responsible families and lending for small businesses," said Office of Management and Budget Director Peter Orszag.

"And the question that arises as part of that is whether, while maintaining flexibility to deal with future financial crises, one can also free up some resources for debt reduction. But we'll have more to say about that later," he told reporters at the Bloomberg Washington Summit.

The U.S. budget gap hit a record $1.4 trillion in the fiscal year that closed at the end of September. At 10 percent of U.S. GDP, it was the largest since World War Two.

In addition, the Treasury Department said on Thursday that the new fiscal year started off with a record shortfall for the month of October, marking the first time the nation had recorded 13 straight months with deficits.

The Troubled Asset Relief Program (TARP) was created in the heat of last year's financial crisis to shore up the banking system after investment bank Lehman Brothers failed. Around $210 billion remains available, including $70 billion repaid by banks that have since been able to raise private capital.

A U.S. Treasury source told Reuters the administration was unlikely to need the entire $700 billion that Congress had authorized, as it shifts the focus of the program toward helping small businesses and the housing sector rather than large banks.

"As that focus shifts, we expect to use significantly less TARP funding than authorized," the source said. "We will maintain the flexibility to deal with a future crisis, and uninvested TARP money is dedicated to reducing the debt." This is currently required by law.