Treasury Secretary Redefines Bailout

The Bush administration is setting a new course for its massive $700 billion economic rescue plan. Treasury Secretary Henry Paulson says the government won't be buying distressed assets after all, and will look for other ways to shore up the financial industry.

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ARI SHAPIRO, host:

This is Morning Edition from NPR News. I'm Ari Shapiro.

RENEE MONTAGNE, host:

Steve Inskeep is on assignment. I'm Renee Montagne. The government's $700 billion plan to rescue financial institutions has taken a turn in the opposite direction. The original idea was for the government to buy up bad mortgages and other assets and to take them off the hands of troubled banks. Yesterday, Treasury Secretary Henry Paulson said he is essentially tossing that idea out the window. Instead, he's simply going to give the banks cash in return for stock. And as NPR's Chris Arnold reports, there's another big change.

CHRIS ARNOLD: So far, this bailout plan has focused on propping up the nation's banks. But at a news conference yesterday, Paulson said he now wants to expand that. He wants to include other companies involved in all sorts of credit that's extended to everyday people: car loans, student loans, and credit cards. That's a big shift, and it shows just how many important parts of the financial system are currently in trouble.

Secretary HENRY PAULSON (Treasury Department): This is creating a heavy burden on the American people and reducing the number of jobs in our economy.

ARNOLD: Paulson zeroed in on what's called securitization. That is when companies make loans or issue credit cards to people and then bundle up that debt and sell it off to investors. Over the years, that's become a giant pipeline for putting cash into people's pockets. It's hugely important to the economy, and there's not nearly enough of it happening right now.

Secretary PAULSON: Approximately 40 percent of U.S. consumer credit is provided through securitization of credit card receivables, auto loans, and student loans, and similar products. This market, which is vital for lending and growth, has for all practical purposes ground to a halt.

ARNOLD: That doesn't sound very good, especially since consumer spending is the biggest driver of the economy and the country is sliding into a recession. We called up Tom Deutsch, Deputy Executive Director with the industry group the American Securitization Forum.

Mr. THOMAS DEUTSCH (Deputy Executive Director, American Securitization Forum): The securitization markets are as frozen as a polar icecap.

ARNOLD: The government's been taking steps to thaw out other parts of the credit markets, and that's been working. But Deutsch says this part of the consumer credit world is still in big trouble. He says when you look at October of this year versus last, there's been a 99 percent drop in the money flowing through the securitization pipeline for mortgages, consumer loans, and credit cards. He says big institutional investors just don't want to buy up new debt.

Mr. DEUTSCH: Just as we had irrational exuberance a couple of years ago in terms of capital flowing into the markets, I think you have irrational depression now where investors have a, you know, very pessimistic view, whether that's founded or unfounded, until there is some trigger mechanism to turn the tide.

ARNOLD: Paulson wants to use some of the federal bailout money to try to prime the pump there and get more credit flowing. He hasn't offered details yet, but money could go to a range of companies. For example, Paulson doesn't want to give direct aid to the U.S. automakers, but this new effort might funnel money to firms like GMAC that make auto loans, which would clearly help the carmakers and consumers.

Professor PETE KYLE (Finance, University of Maryland): There is a tremendous demand for consumer credit.

ARNOLD: Pete Kyle is a finance professor at the University of Maryland. He says people are being squeezed in several ways, given the state of the economy and falling home prices.

Professor KYLE: If you're going to send a kid to college, you might have thought about tapping your home equity. Can't do that anymore. You might have thought about selling some stocks. Well, they may only be worth half what you thought they were worth a few months ago.

ARNOLD: Same thing if you need to buy a car or fix a leaky roof. So getting those car loans or student loans is really important, but some people are having a harder time getting them. That's putting an abnormal drag on the economy at a very bad time. And there's that other big drag on the economy.

Secretary PAULSON: We're examining strategies to mitigate mortgage foreclosures.

ARNOLD: Under the original plan, Secretary Paulson said he wanted the government to help more people stay in their homes.

Secretary PAULSON: Now that we are not planning to purchase illiquid mortgage assets, we must find another way to meet that commitment.

ARNOLD: Paulson said he is still considering a plan from Sheila Bair, the head of the FDIC, which could help far more homeowners than any of the other efforts to date. Chris Arnold, NPR News.

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Paulson Says Focus Of Bailout Will Shift

Treasury Secretary Henry Paulson on Wednesday backed away from the government's plan to use $700 billion in bailout funds to buy troubled mortgage assets and instead called for a fresh injection of cash to financial institutions.

Paulson, seeking to defend the unprecedented and controversial Troubled Asset Relief Program from critics, said the government's new goal would be to support financial markets, which supply consumer credit in such areas as credit card debt, auto loans and student loans.

To date, no toxic assets have been purchased with the bailout funds. At Wednesday's news conference in Washington, Paulson said, "Our assessment at this time is that this is not the most effective way to use TARP funds. But we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources."

He said the Treasury Department and Federal Reserve had "taken the necessary steps to avoid a broad, systemic failure" of troubled banks and financial institutions.

Credit markets became dangerously logjammed in September as interbank lending and loans to businesses ground to a halt, threatening to bring down the global economy.

The Bush administration responded with a rescue plan passed by Congress in October that had originally been aimed at buying up bad debt from banks so they could continue lending.

But Paulson said the financial industry's situation has worsened since the bill was passed, prompting him to spent nearly $250 billion to buy equity stakes in banks.

"Although the financial system has stabilized, both banks and nonbanks 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," Paulson said.

The Treasury secretary warned that the nation's financial system "remains fragile" and that "significant illiquid assets" continued to present difficulties.

But "overall, we are in a better position than we were" two months ago, he said.

Paulson's remarks came on the same day that the Federal Reserve and three other federal banking regulators issued new guidelines to institutions to work with mortgage borrowers to avoid defaults. In addition, the guidance encourages banks to set dividend payments for shareholders and compensation for executives with the current crisis in mind.

Referring to the move, Paulson said that "'ordering' is too strong, but 'encouraging'" best described the guidelines.

He said the Treasury Department was evaluating a second program that would provide government investments that would match private investments in efforts to raise capital.

"In developing a potential matching program, we will also consider capital needs of nonbank financial institutions not eligible for the current capital program," Paulson said.

Earlier, the White House appeared to rule out a rescue for the nation's ailing auto industry, and Paulson on Wednesday reiterated that the financial industry is "where the focus is right now."

He did not rule out expanding the program to car manufacturers, but he warned of the danger of bailing out industries without government oversight.

"I know the automakers are important to the U.S.," he said. "They are a key part of our manufacturing industry. I have said and the administration has said, very clearly, we need a solution, but we need a solution that leads to viability."

As Paulson spoke, U.S. stocks extended early-morning losses that followed on Asian and European markets.

From NPR and wire reports

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