new plan Paulson: Bailout plan moving away from asset buys Associated Press Nov. 12, 2008, 10:35AMShare WASHINGTON — Treasury Secretary Henry Paulson said today the $700 billion government rescue program will not be used to purchase troubled assets as originally planned. Paulson said the administration will continue to use $250 billion of the program to purchase stock in banks as a way to bolster their balance sheets and encourage them to resume more normal lending. He announced a new goal for the program to support financial markets, which supply consumer credit in such areas as credit card debt, auto loans and student loans. Paulson said that 40 percent of U.S. consumer credit is provided through selling securities that are backed by pools of auto loans and other such debt. He said these markets need support. "This market, which is vital for lending and growth, has for all practical purposes ground to a halt," Paulson said. The administration decided that using billions of dollars to buy troubled assets of financial institutions at the current time was "not the most effective way" to use the $700 billion bailout package, he said. The announcement marked a major shift for the administration which had talked only about purchasing troubled assets as it lobbied Congress to pass the massive bailout bill. Paulson said the administration is exploring other options, including possibly injecting more capital into banks on a matching basis, in which government funds would be supplied to banks that were able to raise money on their own. The bailout money also should be used to support efforts to keep mortgage borrowers from losing their homes because of soaring default levels, he said. A proposal to have part of the bailout funds used to guarantee mortgages that have been reworked to reduce monthly payments for borrowers is an approach the administration continues to discuss, but Paulson did not announce that it would be adopted. Federal Deposit Insurance Corp. Chairman Sheila Bair has pushed for that approach. Speaking of the first-ever summit of leaders of the Group of 20 major industrial and developing countries, Paulson said this weekend’s meeting needs to focus first on how to repair the financial system as a way to bolster the global economy. Paulson praised a new set of guidelines issued today by the Federal Reserve and three other bank regulators, saying that they addressed a crucial issue of making sure that banks continue to lend at adequate levels. The guidelines encourage institutions to work with mortgage borrowers to avoid defaults. In addition, the guidelines encourage the banks to set dividend payments for shareholders and compensation for executives with the current crisis in mind. The guidelines seek to address criticism that banks obtaining funds from the $700 billion rescue plan could simply use the money for their own purposes rather than helping struggling homeowners and the overall economy. Critics are concerned that banks, which are getting $250 billion through government purchases of their stock, are not using the money to boost lending to customers, one of the main reasons why the economy is in a crisis. "If underwriting standards tighten excessively or banking organizations retreat from making sound credit decisions, the current market conditions may be exacerbated, leading to slower growth and potential damage to the economy," according to the regulators’ guidance. The Fed, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, and Office of Thrift Supervision said all financial institutions were expected to follow the new guidelines, even those not receiving federal assistance. to prop up further consumer lending.
