Paulson Redefines Scope of $700 Billion Plan

Treasury switches stance on bad-loan purchases in effort to avoid disaster.

November 12, 2008, 6:39 PM

Nov. 12, 2008— -- Treasury Secretary Henry Paulson today said the department's actions to shore up the nation's banks by giving them government money in return for stock had helped the country avoid financial disaster.

"Our system is stronger and more stable than just a few weeks ago," Paulson said. "Although this is a major accomplishment, we have many challenges ahead of us."

Paulson said that prior to adopting the rescue package, the economy was at a "tipping point."

"Before we acted, we were at a tipping point. Credit markets were largely frozen, denying financial institutions, businesses and consumers access to vital funding and credit. U.S. and European financial institutions were under extreme pressure, and investor confidence in our system was dangerously low."

The centerpiece of the $700 billion economic rescue package, adopted by Congress last month, called for the government to buy up bad mortgage loans. Asked then to specify how the money would be used, Paulson said he would outline the "path forward" at a later time.

In a news conference on the state of the financial system today, Paulson addressed the latest plan for the government's rescue package that was appropriated for the Troubled Asset Recovery Program (TARP). Paulson said the mortgage-purchase plan had been abandoned in favor of buying stock in troubled banks.

But seven weeks ago, Paulson told Congress that injecting government money directly into troubled banks would be a big mistake.

"Putting capital in institutions is about failure," he said then. "This is about success."

Paulson believed then that the key to the government's success was to spend billions, buying toxic mortgages from the nation's banks. About $213 billion has been committed under TARP; $125 billion to big banks, an additional $40 billion promised to insurance giant AIG and $47 billion to almost 50 other banks.

"By October 26, we had $115 billion out the door to eight large institutions," Paulson said. "In Washington that is a land-speed record from announcing a program to getting funds out the door. We now have approved dozens of additional applications, and investments are being made in approved institutions."

Treasury Changes Course on TARP

But none of the previously allocated funds will be used to buy toxic mortgages; instead, they will be used to buy bank stock.

"TARP was an illusion," said Art Cashin, director of floor operations at UBS Financial Securities. "It never really happened. TARP never got off the ground."

The Treasury secretary defended the change in strategy as the best way to stabilize the financial system.

"I will never apologize for changing the approach when the facts change," he said.

U.S. Rep. Barney Frank, D-Mass., chairman of the House Finance Committee, said that using government money to boost struggling banks doesn't bother him. Instead, he's concerned about how little of the money will go to helping ordinary Americans.

"With regards to the loans to the banks, more needs to be done so that the taxpayer gets the benefit of it," Frank said. "That was always the intent of this plan. The money is to be re-lent."

Mr. Paulson said today that he'd also like to see some of the $700 billion used to help other financial institutions, including companies that provide car loans, student loans and credit cards. Some even hope the auto industry will qualify for money under TARP, which has some analysts worried.

"It was not a pot of money that was big enough to help every industry that could need assistance," said Jaret Seiberg, policy analyst at the Stanford Group.

Congress will hold hearings next week to determine why big banks that have already received billions of dollars under the TARP program have not done more with that money to help homeowners avoid foreclosure.

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