Paulson Discusses Changes in Bailout Focus

U.S. Treasury Secretary Henry Paulson laid out projected changes in the $700 billion bailout plan on Wednesday, changes that dramatically alter the original intent of the massive spending program.

The buyout of troubled mortgages under the current Treasury Asset Recovery Program (TARP) will not help unfreeze the credit market to get banks to lend to each other or help with the current economic crisis, Paulson said. So rather than move forward with that plan, the bailout funds will go toward shoring up consumer lending.

The program had already been put aside so that $250 billion could be pumped into banks to shore up their liquidity under the Capital Purchase Program. The government got equity stakes in the banks in exchange.

Paulson noted in his speech on Wednesday that the Treasury, the Federal Reserve and the FDIC acted quickly to a financial problem that was brewing on a global basis and was able to stabilize the global financial system.

Paulson also identified three critical priorities that are at the forefront for the remaining $350 billion in bailout funds.

The first priority is reinforcing the stability of the financial system to get banks and other financial institutions that provide credit to a position where they are able to support economic recovery and growth.

Paulson said, “Although the financial system has stabilized, both banks and non-banks may well need more capital given their troubled asset holdings, projections for continued high rates of foreclosures and stagnant U.S. and world economic conditions.”

The next priority he noted was that the markets for securitizing credit outside of the banking systems need support.

“Addressing these two priorities will have powerful impacts on the overall financial system, the strength of our financial institutions and the availability of consumer credit,” he said.

The third priority Paulson spoke of was that the government needs to pay close attention to looking at ways to prevent the risk of foreclosure.

To address these priorities the Fed, Treasury and FDIC are designing and examining strategies for building capital in financial institutions, supporting consumer access to credit and mitigating mortgage foreclosures.  

Paulson said, “All of these strategies are important, but ensuring the financial system has sufficient capital is essential to getting credit flowing to consumers and businesses and that is where the bulk of the remaining TARP funds should be deployed – in a program to support the system and as a contingency reserve for addressing any unforeseen systemic events.”

The priorities would further leverage the impact of TARP investment by attracting private capital, potentially through matching investments – all with an eye to getting more money to flow into the stagnant asset backed security market tied to consumer debt like credit cards, student loans and auto financing. 

If a matching program is developed, Paulson said the government will also consider monetary needs of financial institutions that are not banks and not eligible for the current capital purchase program.

He said, “This asset-backed securitization market is currently in distress, costs of funding have skyrocketed and new issue activity has come to a halt. Today, the illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards. This is creating a heavy burden on the American people and reducing the number of jobs in our economy.”

“We are looking at ways to possibly use the TARP to encourage private investors to come back to this troubled market, by providing them access to federal financing while protecting the taxpayers’ investment,” Paulson continued. “By doing so, we can lower costs and increase credit availability for consumers.”