EconomicWatch: The Bailout Changes

Federal Bailout May Include Credit Card, Loan Companies

U.S. Treasury Secretary Henry M. Paulson Jr. said Wednesday his priority for the $700 billion bailout program will be to bolster banks and consumer lenders, such as credit card, student loan and car loan companies, rather than supporting other struggling industries.

Paulson said officials are also seeking ways to help the nation's struggling homeowners, but he offered no new plan for how the government money might be used to stem the foreclosure crisis. Some of the existing proposals for homeowners, he warned, amounted to a subsidy or spending program, while Treasury's program involves "investment, not spending."

Notably absent from his list of priorities were the nation's automakers, or any other industry beyond banks and other lenders.

The announcement follows weeks in which representatives of the auto industry and other fields, as well as groups representing homeowners, have made a pitch for aid from the Troubled Asset Relief Program. Paulson was given broad authority under the legislation to determine how to spend the money.

"The intent of the TARP was to deal with the financial industry," Paulson noted today. "It's very important for me to live within the intent of the bill, rather than try to find loop-holes or what have you."

In his remarks, Paulson also said Treasury's first plan for the money, which was to have the government buy bad loans from financial institutions would be shelved.

At first, that program "looked like the way to go," he said. "As the situation worsened, the facts changed. The thing I'm grateful for is we were prescient enough and Congress was, that we got a wide array of authorities and tools under this legislation.

"And I will never apologize for changing an approach or a strategy when the facts change."

The money that had been allotted to that program will shift to other priorities, including a new initiative to bolster the number of loans available to people who are financing a college education, or an auto or other consumer purchase. Securities based on credit cards receivables, student loans, auto loans and other loans account for some 40 percent of consumer credit, he said.

"This market, which is vital for lending and growth, has for all practical purposes ground to a halt," Paulson said. "Today, the illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards. This is creating a heavy burden on the American people and reducing the number of jobs in our economy."

The details for loosening consumer credit are still to be worked out, however. He said Treasury is exploring the possibility of the government investing in lending companies besides banks, or offering loans against securities based on consumer debt. With President-elect Barack Obama pressing the need for a new economic stimulus package, Paulson said that bolstering the credit market would provide its own bump to the economy.

"I cannot imagine anything else will have a bigger stimulus impact than getting credit going again, getting lending going again," Paulson said.

Presumably, an increase in consumer credit availability will have an immediate and strong effect on the nation's automakers, too. But Paulson said he does not think that any auto company bailout should be funded by the TARP. And he reiterated the point made by the administration that automakers won't be helped at all in the absence of a plan to make the industry viable.

"We care about our automotive industry, when you look at autos and that whole food chain, it is critical," Paulson said. "We need a solution, but that solution has got to be one that leads to viability. . . . The intent of the TARP was to deal with the financial industry."

Yesterday, House Financial Services Committee Chairman Rep. Barney Frank (D-Mass.) said he will convene a hearing next Wednesday to consider a $25 billion bailout for the Detroit automakers. He said he will summon the chief executves of the Big Three and the head of the United Auto Workers to discuss the need for emergency assistance.

One of the most politically fraught questions facing Paulson is how to help homeowners. The legislation creating the $700 billion program says one of its purposes is to preserve homeownership. But Treasury officials appear to be struggling with just how to get more companies to modify the terms of troubled mortgages.

"I just can't tell you how many proposals I've looked at to modify mortgages and keep people in their homes," Paulson said. "This is a very complicated area. There are no easy answers."

While citing the success of the HOPE NOW program, in which the industry is helping 200,000 homeowners a month, Paulson said Treasury officials were continuing to explore ideas, including one proposed by Federal Deposit Insurance Corp. chief Sheila Bair, which would potentially lower payments so that struggling homeowners could afford them.

But he drew a sharp distinction between those types of mortgage modification programs and the other uses of the TARP money. He views the bank programs as investments in the financial system, not outright grants. The mortgage programs, he said, involve outright grants.

"We must be careful to distinguish this type of assistance, which essentially involves direct spending, from the type of investments that are intended to promote financial stability, protect the taxpayer and be recovered," Paulson said.

Paulson's comments came as the nation's top economic agencies today launched an effort to prod banks to lend more freely to businesses and households, while curbing the amount of money spent on executive compensation and dividends for stockholders.

The statement by the Treasury, the Federal Deposit Insurance Corp. and the Federal Reserve offers the most specific guidance to date on how federal regulators want banks to behave during the current economic crisis. The agencies said that bank supervisors - the regulatory officials that oversee banks - would begin analyzing whether the lending policies of individual institutions have become so strict that they are denying creditworthy borrowers access to money and thus contributing to the country's economic downturn.

Just as loose lending standards had an accelerating effect on the economy when they helped inflate property values and provide funds to underwrite risky loans, the reluctance to lend now may be pushing more than necessary in the other direction -- with tightened lending standards keeping even good loans from being made.

"The agencies have directed supervisory staffs to be mindful of the procyclical effects of an excessive tightening of credit availability," the statement said.

Lisa

US Treasury