Paulson Says Troubled Assets Will Not Be Purchased

WASHINGTON (AP) – Urgently shifting course, the Bush administration is abandoning the centerpiece of its massive $700 billion economic rescue plan and exploring new ways to shore up not only banks but credit-card, auto-loan and other huge nonbank businesses.

Democrats are pressing hard to include a multibillion-dollar bailout for faltering automakers, too – over administration objections.

Unimpressed by any of the talk on Wednesday, Wall Street dove ever lower.

“The facts changed and the situation worsened,” Treasury Secretary Henry Paulson said at a news briefing, explaining the administration’s switch from its original plan to help financial institutions by buying up troubled assets, primarily securities backed by bad home loans.

Despite its new flexibility, the administration remained opposed to using the rescue fund to bail out the ailing auto industry or to provide guarantees for home loans, an idea that supporters contend offers the greatest hope for helping legions of Americans who are facing foreclosure.

Congressional Democrats felt otherwise on autos, and strongly. House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid were pressing for quick passage of a major package for carmakers during a postelection session that begins next Tuesday, and one key House Democrat was putting together legislation that would send $25 billion in emergency loans to the beleaguered industry in exchange for a government ownership stake in the Big Three car companies.

Not all the news was bad, Paulson suggested. He said the rescue program approved by Congress a month ago has already had an impact in dealing with the most severe financial crisis in decades, a credit squeeze that is threatening to push the country into a deep and prolonged recession.

“Our system is stronger and more stable than just a few weeks ago,” he said. But he cautioned that much more needs to be done before the economy can turn the corner.

To accomplish those goals, Paulson said the administration would continue to use $250 billion of the $700 billion rescue fund to make direct purchases of bank stock as a way of supplying hundreds and potentially thousands of banks with extra capital in hopes that they will resume more normal lending.

But Paulson said the administration had decided that the original focus of the bailout program – the purchase of distressed mortgage-backed securities and other troubled assets on the books of banks – would not be employed. He said the administration had changed the emphasis because of a need to get money into the financial system much more quickly because of a worsening credit crunch. Setting up a purchase program for the bad assets was taking too much time, officials said.

It was another rough day on Wall Street as investors received more bad news on corporate earnings and were also disappointed by Paulson’s decision not to mop up bad assets of financial institutions. The Dow Jones industrial average fell for the third straight session, plunging 411.30 points to close at 8,282.66, the lowest close since it hit a 5-year low on Oct. 27.

But lawmakers applauded Paulson’s switch, saying the administration was finally recognizing that its initial plan was flawed.

“I am glad that Secretary Paulson and the rest of the Treasury team have finally seen the light,” said Sen. Charles Schumer, D-N.Y. He said he would still like to see more strings attached to make sure banks use their bailout money to increase loans.

Paulson also said the administration was exploring the possibility of setting up a program in conjunction with the Federal Reserve that would provide support for the $1 trillion market in securities that fund such vital consumer products as credit cards, auto loans and students loans. About 40 percent of consumer credit is supplied through the sale of these securities that are backed by payments consumers make on their credit cards and other loans.

“This market, which is vital for lending and growth, has for all practical purposes ground to a halt,” Paulson said. In response to a question, he said it would take weeks to design a program, which officials suggested might involve having the Federal Reserve provide loans.

The administration has already spoken for all but $60 billion of the initial $350 billion supplied by Congress, including the $250 billion for direct stock purchases from banks and $40 billion for a new loan supplied on Monday to help stabilize troubled insurance giant American International Group.

Paulson said he believed the $700 billion would be sufficient to stabilize the financial system. He would not give an estimate on when Congress would need to authorize the second $350 billion. With the Bush administration leaving office on Jan. 20, decisions on spending the second $350 installment could well be made by the incoming Obama administration.

Paulson said he had met Monday with officials from President-elect Obama’s economic transition team.

On the issue of using the bailout package to help ailing auto companies, Paulson said the administration preferred an approach that would accelerate distribution of $25 billion Congress approved in separate legislation this fall. Obama had pressed the auto companies’ case in his own meeting with President Bush on Monday.

Some of the bailout money could be used to support efforts to keep homeowners from losing their houses because of soaring default levels, he said, but he rejected tapping the fund to provide partial guarantees to financial institutions for mortgages they agree to rework.

This approach is being pushed by Sheila Bair, head of the Federal Deposit Insurance Corp., who has said the government guarantees would provide an attractive incentive to banks to modify mortgages to more affordable levels.

Paulson praised a new set of guidelines issued Wednesday by the Federal Reserve and other bank regulators, saying they addressed crucial issues such as making sure that banks use the rescue assistance for its intended purpose of increasing lending.

Critics have charged that some banks may be tempted to hoard the money or use it to pay out dividends to shareholders or boost compensation for their executives unless regulators tighten standards.

By MARTIN CRUTSINGER, AP Economics Writer

(Copyright 2008 by The Associated Press. All Rights Reserved.)