Treasury Secretary Henry Paulson said today that he is veering from the original plan to use the $700 billion bailout package to buy up illiquid mortgage assets, and will now spend the money on consumer credit issues and shoring up more capital for non-banks and banks.
In his remarks, Paulson said that while “the actions taken by Treasury, the Federal Reserve and the FDIC in October have clearly helped stabilize our financial system,” he said that the financial system “remains fragile in the face of an economic downturn here and abroad, and financial institutions’ balance sheets still hold significant illiquid assets. Market turmoil will not abate until the biggest part of the housing correction is behind us. Our primary focus must be recovery and repair.”
Paulson said Treasury has evaluated three options “for most effectively deploying the TARP funds.” Although the financial system has stabilized, he said, “both banks and non-banks 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.” Second, he said, the important markets for securitizing credit outside of the banking system also need support. “Approximately 40% of U.S. consumer credit is provided through securitization of credit card receivables, auto loans and student loans and similar products. 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.” The third option, he said, is continuing “to explore ways to reduce the risk of foreclosure.”