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Treasury Secretary Henry Paulson told Congress
Tuesday he opposes tapping a $700 billion taxpayer-funded pool to
help struggling U.S. automakers as he and Federal Reserve Chairman
Ben Bernanke defended their management of the bailout program, just
one week after the administration abandoned the original strategy
behind the rescue.


      Although having a U.S. auto company fail during such a fragile
time for the economy would not be a "good thing," Paulson told
the House Financial Services Committee that he remains opposed to
diverting $25 billion of the bailout money to aid Detroit as the
panel's chairman Rep. Barney Frank, D-Mass., and other Democrats
want.


      "I don't see this as the purpose" of the bailout program,
which is intended to stabilize jittery financial markets and get
lending flowing more freely again, which eventually should help
revive the ailing economy, Paulson said.


      The U.S. has "turned a corner" in averting a financial
collapse, but more work needs to be done to get things back to
normal, he said.


      Focusing the bailout program on infusing billions into banks -
and possibly other types of companies - to pump up their capital
and bolster lending to customers was deemed a faster and more
effective approach to stabilizing the financial system than buying
rotten assets from financial institutions, the centerpiece of the
original plan, Paulson explained.


      Buying those toxic debts would have required a "massive
commitment" of the bailout money, Paulson told the panel. As
economic and financial conditions quickly worsened, it became clear
that the first installment of the money - $350 billion - for that
purpose "simply isn't enough firepower," he said.


      It's crucial that the administration be nimble in assessing
changing conditions and adapt the bailout strategy accordingly, the
Treasury chief said. 


"If we have learned anything throughout this
year, we have learned that this financial crisis is unpredictable
and difficult to counteract," Paulson said.


      Last week, Paulson changed course and said the government would
not use any of the $700 billion to buy bad assets from banks. That
had been the focus of the plan Paulson and Bernanke originally
pitched to lawmakers.


      "There is no playbook for responding to turmoil we have never
faced," Paulson said. "We adjusted our strategy to reflect the
facts of a severe market crisis."


      But lawmakers worried the administration was sending confusing
signals to taxpayers and Wall Street investors.
     

 "We all understand that when conditions on the ground change,
policymakers must be agile enough to adjust to those changed
circumstances," said Rep. Spencer Bachus, R-Ala. "But changing
too quickly, without adequately explaining why you've changed or
what you're going to do next, risks sending mixed signals to a
marketplace that is in dire need of certainty and a sense of
direction."


      Rep. Paul Kanjorski, D-Pa., complained about the
administration's "180 degree change in policy," which he didn't
necessarily fault, but suggested could hurt public confidence. 

"Do we have a plan? Where are we going?" Kanjorski asked.


      Going forward, the ability of Treasury to use the bailout
program for capital injections and to take other steps to stabilize
the financial system - including any actions needed to prevent the
disorderly failure of a major financial institution - "will be
critical for restoring confidence and promoting the return of
credit markets to more normal functioning," Bernanke told the
panel.


      Paulson said the department will focus on rolling out a capital
injection program to pour $250 billion into banks in return for
partial ownership stakes in them.


      Treasury also will search for new ways to boost the availability
of auto loans, student loans and credit cards, which have been
become harder to get due to the credit crisis.
      

Specifically, the department along with the Federal Reserve, is
exploring using some of the bailout money to bankroll a new loan
facility designed to help companies that issue credit cards, make
student loans and finance car purchases. 


Paulson said he expected
putting up only a "relatively modest share" of the bailout money
for this facility.


      Paulson expressed reservations about using some of the bailout
money to provide guarantees for mortgages at risk of falling into
foreclosure. However, the administration will look for ways to
provide foreclosure relief, he said.


      In a break with the administration, Federal Deposit Insurance
Corp. Chairman Sheila Bair, also testifying before the panel,
pressed anew for using $24 billion of the bailout money to help
some American households avoid foreclosure. 


As foreclosures mount,
the government is "clearly falling behind the curve," she warned.


      Bernanke, meanwhile, called Bair's plan a "very promising
approach."

      So far, the Treasury Department has pledged $250 billion for
banks and has agreed to devote $40 billion to troubled insurer
American International Group- its first slice of funds going to a
company other than a bank. That leaves just $60 billion available
from Congress' first bailout installment of $350 billion.


      Paulson said he is not planning to initiate another capital
injection program beyond those already announced. Thus he's
unlikely to tap the remaining $350 billion before the Bush
administration leaves office on Jan. 20. That would mean the
incoming administration of President-elect Barack Obama would
decide whether and how the money should be spent.


      The idea behind the capital injection program is for banks to
use the money to rebuild reserves and lend more freely to
customers. However, banks do have the leeway to use the money for
other things, such as buying other banks, paying dividends to
investors or bonuses to executives. That has touched a nerve with
some lawmakers.


      Locked-up lending is a prime reason why the U.S. is suffering
through the worst financial crisis since the 1930s. All the fallout
from the housing, credit and financial crises have badly hurt the
economy, which is almost certainly in recession, analysts say.
      

Gallery

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Target CEO remains optimistic, despite dismal earnings report

Treasury Secretary Henry Paulson told Congress
Tuesday he opposes tapping a $700 billion taxpayer-funded bailout pool to help struggling U.S. automakers.

Paulson, Bernanke defend $700 billion bailout

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