WASHINGTON - Treasury Secretary Henry Paulson's surprise
announcement Wednesday that he'll shift from purchasing troubled assets
under the $700 billion Wall Street rescue plan is likely to result in
spending taxpayers' dollars to shore up unregulated financial
institutions that aren't banks but are vital to consumer lending.
During the negotiations on a bank rescue bill in late September and
early October, Paulson argued that he needed broad authority to
purchase distressed mortgages and other bad assets in order to clean up
bank balance sheets and allow them to resume lending. Despite extensive
misgivings, Congress created the Troubled Asset Relief Program. Now
Paulson's ripping up that plan.
assessment at this time is that this is not the most effective way to
use TARP funds, but we will continue to examine whether the targeted
forms of asset purchase can play a useful role," Paulson said Wednesday
in an update on rescue efforts that have changed course.
In a news conference, Paulson was unapologetic, noting that the facts have changed and the global financial crisis has worsened.
will never apologize for changing an approach or strategy when the
facts change," he said. "I think the apology should come the other way:
if someone doesn't change when the facts change. I think we move
quickly, we move powerfully to address the situation as it exists."
the man who shepherded the legislation through Congress, Rep. Barney
Frank, D-Mass., was unhappy that the Treasury has moved away from plans
to buy mortgage bonds and individual loans in order to prevent
foreclosures by modifying the loans.
"We especially put in that
bill authority to the secretary of the treasury to buy whole loans
(and) mortgage-backed securities to make us the lender - to make us the
owner - so we could do these kind of reductions," said Frank, the
chairman of the House Financial Services Committee.
denied that the decision had anything to do with difficulty in
determining what the Treasury Department would pay for distressed
mortgages and other bad assets. He said it became apparent that direct
investments in banks and other companies were a more effective and
immediate way to shore up the financial system.
"The top priority
has to be stability, making sure we have the resources in reserve to
deal with any systemic events and make sure we have got capital to put
into institutions," Paulson explained.
Instead of buying bad
assets, the Treasury will address a complex area of lending that's been
crucial to U.S. economic vitality. Paulson said he'd focus on boosting
consumers' access to credit outside the banking system.
Treasury and the Federal Reserve, he said, are working on a program
that targets securitization. That's the process in which credit card
debt, student loans and car loans are bundled together and securitized,
or sold as bonds to investors, who receive monthly payments as
Americans pay on their credit card bills and loans.
gave millions of Americans more access to credit over the past decade.
As of last year, outstanding securitized debt for credit cards, car
loans and student loans was valued at almost $2.5 trillion.
however, investors are barely buying any securitized products, largely
because securitized sub-prime mortgages have tarnished the image of
anything that's packaged and pooled.
The Treasury and the Fed
will develop a program that subsidizes the purchase of asset-based
securities. It appears that the Treasury, through the Troubled Asset
Relief Program, will become a co-investor with pension funds and other
institutional investors that traditionally bought asset-backed
"We're in the process of working with the Fed to
design it. And the idea I presented very generally was a program of
liquidity which would make financing available to the buyers of this,"
Paulson said. He said that it was difficult since it involved lending
to financial market players that weren't directly regulated by the Fed
or his department.
TARP money would be used as an incentive for
investors to begin buying these financial instruments again, and the
asset-relief program would incur the first loss in case of default.
Financial markets were caught by surprise, but they supported the new focus on securitization.
recent turmoil has stalled large parts of this market, and restarting
it will help ensure consumers get the loans they need for homes, cars
and education," Tim Ryan, the head of the Securities Industry and
Financial Markets Association, said in a statement.
trade group, which represents some of the biggest players in finance,
was unhappy that Paulson shelved the plan to buy troubled assets from
"I am disappointed Treasury is choosing to de-emphasize
the asset purchase portion of the TARP program," Ryan said, noting that
it would have helped to price assets that no one in the private sector
wants to buy. "Until we have a functioning marketplace - where buyers
and sellers agree on prices and institutions can subsequently judge the
value of the assets they hold - uncertainty could keep many financial
players on the sidelines, restricting lending capital for the larger
Tom Deutsch, the deputy executive director of the
American Securitization Forum, the trade group for companies that pool
and package debt, said attempts to thaw this market were badly needed.
is completely frozen. And if banks aren't able to access capital from
the securitization markets, they are not able to lend any capital back
to borrowers for farms, for cars, for homes, etc.," he said. "And so
until we get that securitization process restarted, we're not going to
be able to get credit flowing back to consumers in America."
treasury secretary said he wasn't ruling out a proposal from the
Federal Deposit Insurance Corp. that would spend rescue money to help
write down distressed mortgages and keep people in their homes. Such a
plan requires spending, not investing, as has been the approach with
bolstering banks' balance sheets. Officials hope that the invested
funds will be repaid when the banks return to profitability.
Paulson should be as quick to realize that the foreclosure issue is
critical to solving our problems as he was in realizing that equity
purchases were necessary," Senate Banking Committee Chairman
Christopher Dodd, D-Conn., said in a statement Wednesday, calling for
adopting the FDIC plan to help homeowners.