Paulson tries Plan B
Donna Blockby Donna Blockfrom The Deal.com
You can say this for Treasury Secretary Henry Paulson: He's not afraid to change his mind.
After spending more than a month negotiating with bankers over how to establish a program to buy bad assets and get them off the industry's books, he announced Nov. 12 that he was giving up on the idea. No matter that asset purchases were once the primary focus of the $700 billion financial rescue he convinced Congress to pass. He's got a better idea.
The government is adding stricken nonbank lenders and other financial businesses to the list of institutions that will get direct federal aid.
Paulson, in presenting an update on the Treasury's financial rescue efforts, defended the unprecedented and controversial Troubled Asset Relief Program and said the government's new goal would be to support financial markets supplying consumer credit such as credit card debt, auto loans and student loans, in addition to mortgages.
To date, no toxic assets have been purchased with the bailout funds, even though that was the centerpiece of the authorizing legislation Congress passed in October. But Paulson said almost as soon as Treasury received the money, things had changed and giving capital to banks in return for preferred stock was a better use of the funds.
"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," the Treasury secretary said.
Plan B would be a new facility to revive the loan securitization market. Details of how this program would work are still being drawn up but Paulson is considering having companies that accept new taxpayer funding get matching private capital.
"In developing a potential matching program, we will also consider capital needs of nonbank financial institutions not eligible for the current capital program," he said.
Paulson also said support was needed for markets that securitize credit outside mortgage lending. "This market, which is vital for lending and growth, has for all practical purposes ground to a halt," Paulson said, adding that increasing efforts to make investments in financial institutions will give banks a greater degree of confidence. Continued...
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