Acknowledging that U.S. financial bailout costs may rise, Treasury Secretary Timothy Geithner on Tuesday said the Obama administration will work with Congress to determine the size and shape of future rescue efforts

In testimony before the U.S. House of Representatives Ways and Means Committee, Geithner said a $250 billion placeholder provision in Obama's budget plan for additional financial stability costs did not represent a specific request.

The fiscal 2010 budget acknowledges that, as expensive as it already has been, our effort to stabilize the financial system might cost more, Geithner said in prepared remarks..

The placeholder, which would allow the Treasury to purchase $750 billion in financial sector assets, will help ensure we can cover any additional financial stability costs.

This amount would be in addition to the $700 billion that the U.S. Treasury is spending through a financial rescue fund approved by Congress in October. That fund is more than half spent or committed.

As more information becomes available, the Obama administration will estimate those costs and work with Congress to determine the appropriate size and shape of the efforts, Geithner said.

He defended a deal made over the weekend to prop up staggering insurance giant American International Group with up to another $30 billion in taxpayer funds, saying that allowing the company to default on its obligations would cause catastrophic damage to the American people.

He said the global financial situation has dramatically worsened since AIG was first rescued in September 2008 and this has put more pressure on the economy and AIG.

The most effective thing to do is to try to make sure that that firm can be restructured over a period of time ... and so that we can get through this, he said.

Stocks were higher on Tuesday after President Barack Obama said stocks were potentially a good deal at current valuations, offsetting persistent uncertainty about government bank stabilization efforts. U.S. Treasury debt prices were lower on continued concerns about the potential for oversupply.

Geithner said the Obama budget plan addresses deep challenges for an economy that is shrinking and caused the administration to inherit a $1.3 trillion budget deficit.

The contraction in credit is causing more job losses and further declines in business activity, which, in turn is adding more pressure on the financial system, the Treasury secretary said.


Geithner also said it was important to bring deficits down in four years to around 3 percent of gross domestic product, keeping the national debt from growing faster than the economy itself. The budget proposes to do this in part by raising tax rates after 2011 on couples earning more than $250,000, a plan criticized by Republicans.

Failure to reduce deficits to this level would result in higher interest rates as government borrowing crowds out private investment, leading to slower growth and lower living standards for Americans, he added.

Geithner also said the Obama administration intended to recoup lost revenues by cracking down on tax shelters and the use of offshore structures and accounts by corporations.

Over the next several months, the president will propose a series of legislative and enforcement measures to reduce such U.S. tax evasion and avoidance, Geithner said.

(Reporting by David Lawder; Editing by Jonathan Oatis)