U.S. & World

WASHINGTON (CBS News) ― Some of the largest U.S. banks sharing in the $700 billion government bailout of the financial industry tried to assure lawmakers Thursday they are using the money to make more loans and help financially strapped homeowners avoid foreclosure.

Barry L. Zubrow, chief risk officer with JP Morgan Chase, told the Senate Banking Committee that a portion of the $25 billion capital infusion it received from the Treasury Department was being deployed to "expand the flow of credit" and to assist with rewriting residential mortgages for up to 400,000 families.

Zubrow and executives with Goldman Sachs Inc., Bank of America and Wells Fargo & Co. told the committee that that none of the $85 billion they have received collectively from the government is being used to pay salaries or bonuses.

"The committee has asked whether (bailout) funds would be spent on executive compensation," said Jon Campbell, regional banking president for Wells Fargo & Co. in his testimony. "The answer is no. Wells Fargo doesn't need the government investment to pay for bonuses or compensation."

But lawmakers said there was little evidence that the bailout money had been used to expand lending as intended, and pressed bank leaders for commitments.

"Let me say as clearly as I can," said committee chairman Sen. Christopher Dodd, a Democrat. "Hoarding capital and acquiring healthy banks are not - I repeat are not - reasons why Congress authorized $700 billion in emergency funding."

With foreclosures still on the rise, Dodd said the bailout has done little to "stop the bleeding," reports CBS News investigative correspondent Sharyl Attkisson.

"It is still confounding to me why the secretary of the treasury and others refuse to understand this is the heart of the problem," he said.

Sen. Charles Schumer, a Democrat, said he and other lawmakers are looking at requiring banks to make more loans as a condition for taking part in the $350 billion second half of the bailout. "Any new capital injections must come with tougher requirements," he said.

Treasury has already loaned out or committed $290 billion of the first half. Democrats are working on a bill they hope to pass next week that would devote another $25 billion to the beleaguered auto industry, with the specific intent of helping General Motors Corp. avoid bankruptcy.

Lawmakers hoped that that the infusion of capital to banks would enable them to increase lending. But so far that hasn't happened, lawmakers say.

Sen. Tim Johnson, a Democrat, said he was alarmed by reports of continued generous compensation packages and benefits for executives of companies getting bailout funds.

"The intent of the bailout was to stabilize troubled financial institutions and help those businesses and individuals and Main Street affected by the credit freeze," said Johnson. "Those making the decisions on how to spend the $700 billion, and those receiving the funds, must remember this intended use."

Goldman Sachs and Morgan Stanley have each reportedly set aside more than $6 billion for end-of-year bonuses, reports Atkisson. The bankers promise it's a different pool of money from the taxpayer funds, but some senators remained skeptical.

"It flies in the face of reality that you can somehow draw these bright lines between public monies and private monies and retained earnings when it comes to some of these issues," said Dodd.

Congress can block release of the second $350 billion. It can also rewrite the law to put new conditions on its use.

Separately, the House Oversight Committee met today to examine the role that hedge funds may have played in recent market turbulence.

The broader debate on the use of the bailout fund may not be resolved until President-elect Barack Obama takes office on Jan. 20 and pursues policies for administering the rescue program that are likely to be more closely aligned with his Democratic allies in Congress.

The economic meltdown that Obama will inherit was publicly declared a recession on Thursday by a major global economic cooperative, the Organization for Economic Cooperation and Development, of which the United States is one of 20 members.

The Paris-based OECD said in a statement that the economies of the U.S., Japan, and Europe were in recession, and the developed world's collective economy was on track to shrink 0.3 percent during 2009.

Attkisson reports that the massive taxpayer bailout of the banking system - sold to the American public as transparent - is veiled in secrecy.

Treasury Secretary Henry Paulson announced Wednesday that the administration had decided to scrap what had originally been the centerpiece of the program - a proposal to buy troubled assets to get them off the books of banks as a way of promoting increased lending.

Instead, the government is using tax dollars to buy massive shares in some of the nation's biggest and most successful banks - with virtually no strings attached, reports Attkisson. And that's all allowed under Congress' plan.

Attkisson and the CBS News investigative team decided to ask the banks directly what they are doing with Americans' tax money. Their responses were, on the whole, less than enlightening.

(© 2009 CBS Broadcasting Inc. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. The Associated Press contributed to this report.)