Treasury Secretary Henry Paulson said the department's Troubled Asset Relief Program would begin to focus more on relieving tight consumer credit markets and shift away from the original plans to buy mortgage-backed securities.
Paulson acknowledged that the plan he pitched to lawmakers for the Treasury to buy up hard-to-value assets that were clogging bank balance sheets was essentially a non-starter even before Congress approved the financial rescue package. Instead, he and his colleagues decided that the best course of action was to inject capital directly into banks by purchasing preferred stock.
"During the two weeks that Congress considered the legislation, market conditions worsened considerably," he said. "It was clear to me by the time the bill was signed on October 3 that we needed to act quickly and forcefully, and that purchasing troubled assets - our initial focus - would take time to implement and would not be sufficient given the severity of the problem. In consultation with the Federal Reserve, I determined that the most timely, effective step to improve credit market conditions was to strengthen bank balance sheets quickly through direct purchases of equity in banks. "
Paulson is under pressure because the Treasury has already allocated all but $60 billion of the initial $350 billion that Congress has approved for the department to distribute out of the overall $700 billion package. Meanwhile a variety of industries have been pushing for a slice of the pie, including automobile makers. So far, the Treasury has rebuffed the auto industry, but Paulson signaled that he was at least open to providing relief to providers of automobile loans, which could help GMAC, for example.
Paulson said the Treasury would also begin to address other consumer finance sectors such as credit card companies. "Approximately 40 percent of U.S. consumer credit is provided through securitization of credit card receivables, auto loans, and student loans and similar products," he said. "This market, which is vital for lending and growth, has for all practical purposes ground to a halt. 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."
Paulson also said the Treasury would put more emphasis on efforts to help homeowners avoid foreclosure, even though the Treasury's original plan to buy mortgage-backed assets and thereby press mortgage servicers to make more loan modifications is being shelved. "Now that we are not planning to purchase illiquid mortgage assets, we must find another way to meet that commitment," he said.
He cited the Federal Deposit Insurance Corp.'s work with IndyMac Bank on mortgage modifications as one model that could be followed. He said such a program could potentially allow hundreds of thousands more borrowers to stay in their homes at an affordable monthly mortgage payment. However, FDIC chair Sheila Bair has said that another mortgage modification proposal announced on Tuesday by the Treasury "is a step in the right direction but falls short of what is needed."
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