By Robert Schmidt and Rebecca Christie
(Bloomberg) – Treasury Secretary Timothy Geithner told Congress that the Obama administration is extending the $700 billion financial-rescue program until October, saying the U.S. must hold on to the money in case of new financial shocks.

In a letter today to congressional leaders, Geithner said the administration doesn’t expect to deploy more than $550 billion of the funds. The Treasury may expand the Federal Reserve’s Term Asset-Backed Securities Loan Facility, an effort to jumpstart securitization markets, as well as continue to use the Troubled Asset Relief Program to help struggling homeowners and small companies, he said.

“As we wind down many of the government programs launched initially to address the crisis, it is imperative that we maintain this capacity to respond if financial conditions worsen and threaten our economy,” Geithner wrote.

The TARP, passed in October 2008 to prevent a collapse of the financial system, has drawn criticism from lawmakers in both parties for aiding the biggest banks rather than average citizens. The Obama administration, preparing the ground for an extension, has emphasized that it’s winding down assistance for Wall Street firms.

“There has rarely been a less loved or more necessary emergency program than TARP,” President Barack Obama said yesterday in a speech in Washington. “I’m asking my Treasury secretary to continue mobilizing the remaining TARP funds to facilitate lending to small businesses.”

TARP Law

While the TARP law called for the rescue to end on Dec. 31, it also gave the Treasury secretary authority to extend its duration until Oct. 3, 2010, by notifying Congress.

In his letter to House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid, Geithner cautioned that prematurely ending TARP could harm the nascent economic recovery.

The Treasury chief also said that the winding down of rescue programs by the Fed and Federal Deposit Insurance Corp. “creates a financial environment in which new shocks could have an outsized effect — especially if an adequate financial stability reserve is not maintained.”

The move to continue the rescue program poses political risk for the administration.

Unemployment at 10 percent has sapped Obama’s approval ratings and threatens to cut into the Democratic Party’s majorities in Congress.

Poll Findings

A year into Obama’s presidency, only 32 percent of poll respondents believe the country is headed in the right direction, down from 40 percent who said so in September, according to a Bloomberg National Poll.

The poll of 1,000 U.S. adults was conducted Dec. 3-7 by Selzer & Co., a Des Moines, Iowa-based firm. The margin of error is plus or minus 3.1 percentage points.

The Fed forecasts the jobless rate will range from 9.3 percent to 9.7 percent in the fourth quarter of 2010. Voters will cast ballots in congressional elections in November.

The Treasury said this week the ultimate cost of the program would probably be $200 billion less than the administration’s August estimate of $341 billion.

Banks have paid back $71 billion so far, and a planned repayment by Bank of America Corp. would bring that figure to $116 billion. Geithner, in today’s letter, said he expects the TARP to get as much as $175 billion from banks by the end of 2010.

House Majority Leader Steny Hoyer, a Maryland Democrat, said yesterday lawmakers may seek to finance between $75 billion and $150 billion in highway construction and other job-creating measures with unused TARP funds.

Congressional Republicans are opposed to any plan that would tap the financial bailout fund.

To contact the reporter on this story: Robert Schmidt in Washington at rschmidt5@bloomberg.net.

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