Treasury Secretary Henry Paulson broadened the reach of the $700 billion financial rescue program on Wednesday, but resisted pressure from top Democrats to allocate money to struggling automakers and homeowners.
Paulson said the bailout fund would not buy up asset-backed securities, as the plan was originally sold to Congress, but shifted the focus to give the Treasury Department broader discretion in how to spend the funds and focus more directly on consumers.
"Over these past weeks, we have continued to examine the relative benefits of purchasing illiquid mortgage-related assets," said Paulson. "Our assessment at this time is that this is not the most effective way to use TARP funds."
Paulson's comments came as his frequent ally in Congress, House Finance Services Committee Chairman Barney Frank (D., Mass.), urged the secretary to be more flexible in using the rescue funds on two fronts: aid to the auto industry and foreclosure relief for homeowners.
Frank expects to release legislation Monday that would authorize Treasury to use up to $25 billion to help companies like General Motors weather their cash troubles this winter. The House Financial Services Committee, which Frank chairs, will hold a hearing on extending the rescue program to the auto industry next Wednesday.
The chairman told Politico that the time was ripe for President-elect Barack Obama to ask Paulson to release the great bulk of the second $350 billion to help capitalize efforts to modify mortgages for homeowners.
Paulson said he has "no timeline" to ask for the second $350 billion but feels "comfortable" with the $700 billion total sum.
"It was clear to me by the time the bill was signed, on October 3rd, that we needed to act quickly and forcefully, and that purchasing troubled assets, our initial focus, would take time to implement and would not be sufficient given the severity of the problem," he added, explaining why TARP money would now be committed to equity stakes rather than buying up distressed mortgage-backed assets.
The funds may be extended to include non-banking financial institutions said Paulson, who added that the Treasury is examining ways to have private investors help loosen up the credit markets, and ways to increase consumer access to credit outside the banking system, including the idea of federal financing to private investors in securities backed by assets such as auto, student and credit-card loans.
Paulson's announcement was a public acknowledgment by the administration that the hundreds of billions of dollars spent thus far to buy up complex mortgage-related assets were not solving the economic crisis that their misuse triggered, or helping to lubricate the dried-up credit markets.
"TARP really gave no incentive for the banks to lend the money, carrot or stick, and that's a big problem," said Sen. Charles Schumer, (D-N.Y), who called for greater scrutiny of executive compensation and mergers at banks that accept Treasury help.
The Secretary also announced that the Treasury Department was exploring ways to "mitigate" foreclosures and is continuing to "discuss" a mortgage modification proposal developed by FDIC Chairwoman Sheila Bair for loans that had been held by IndyMac Bank, which went into FDIC receivership in August. Treasury, though has yet to agree to or implement the plan.
"He's punting," Frank said of Paulson's hesitation to embrace the mortgage relief programs. The Massachusetts Democrat said more money was needed for mortgage modification, and joked that he wanted to be the "shadchen"—Yiddish for matchmaker—joining Paulson and Obama in this same direction.
"Until we deal with [the] mortgage crisis [we're] not going to solve [the] crisis on Wall Street," agreed Schumer, (D-N.Y), who praised Blair's efforts and urged Paulson to do more to help homeowners on a Wednesday afternoon conference call with reporters.
In the case of the auto industry, Democrats seems to have settled on a match; it's just no one has set the date. Speaker Nancy Pelosi (D., Cal.) was still equivocal on Wednesday about whether she will bring the House back from recess to deal with the issue next week to try and push through new programs and priorities during the final days of the Bush administration. And for all their bold rhetoric, House Democratic leaders seem to want to see first what the chances are of Senate action before calling their members back.
Toward this end, Frank said he had consulted with Rep. Sandy Levin (D., Mich.), whose brother Sen. Carl Levin, also a Michigan Democrat, will carry the bill in the Senate. The first option is to see if the Senate can add the aid money to an existing House-passed bill extending unemployment benefits. But if that option doesn't work, Frank said he will have a bill ready by Monday and a hearing held Wednesday.
"Something of this magnitude should be subject to a clear vote," Frank said, effectively supporting those who argue that bailout program is not yet subject to adequate Congressional oversight. But he said he wasn't ready himself to talk about floor consideration. "That's up to the leadership. That's beyond me."
House Republican Leader John Boehner (R-OH) urged the Treasury to provide more information about how the agency is using tax dollars, in the wake of news reports that the Federal Reserve has yet to identify the recipients of almost $2 trillion of emergency loans.
"Transparency is even more important now, given that the program appears to have been implemented in some ways that were given little to no discussion as Congress was being urged to pass the rescue plan," he said in a statement.
The moves hints that the next Treasury secretary could face heightened congressional scrutiny, particularly when it comes time to collect the second $350 billion installment of the rescue fund.
"If the economy needs it, Congress is going to approve it, but we might approve it with certain provisions," said Schumer.
