Paulson expands bail-out to credit firms; no help for Detroit (Roundup)

By Pat Reber Nov 12, 2008, 17:39 GMT

Washington - US Treasury Secretary Henry Paulson Wednesday said he plans to shift some of the focus of the second half of the government's massive financial rescue action to credit card and loan companies and shelve original plans to buy up bad mortgage assets from finance firms.

He also dismissed a proposal that the 700-billion-dollar rescue plan should be used to bail out the ailing auto industry.

Paulson said that the first half of the rescue programme, or 350 billion dollars, had prevented 'broad systemic' damage to a financial system that had been on the 'tipping point,' but warned the financial system 'remains fragile' and needs broader help.

'Our system is stronger and more stable than just a few weeks ago,' Paulson said. 'Market turmoil will not abate until the biggest part of the housing correction is behind us.'

Paulson said that his department had scrapped the original idea of directly buying up bad mortgage assets from financial firms because market conditions had 'worsened considerably' by the time the rescue plan passed Congress on October 3.

'We needed to act quickly and forcefully (and) purchasing troubled assets ... would take time to implement,' Paulson said.

Instead, Paulson moved immediately to spend 250 billion dollars by buying up preferred bank stock. He noted that earlier Wednesday, banking regulators confirmed that such measures had helped all banks, not just those participating in the purchase programme, to free up lending.

He said some of the rest of the money would continue to be used for banks.

Paulson dismissed a reporter's suggestion that scrapping the idea of buying up mortgage assets betrayed the original concept sold by Paulson to Congress.

'I will never apologize for changing a strategy or an approach if the facts change,' Paulson quipped.

Paulson rejected the idea that the bail-out programme, known as the Troubled Assets Relief Program (TARP), could also be used to help ailing automakers as congressional Democrats have requested, although he agreed the automakers were 'critical' to the US manufacturing industry.

He said TARP was aimed at only helping the finance industry and unblocking credit. But Congress must approve the next 350-billion- dollar rescue tranche, and was already considering legislation that could force Paulson's hand, the Wall Street Journal reported.

'I think the administration needs a solution, but it's got to be one that leads to viability' of the auto industry, Paulson said.

With 19 world leaders converging on Washington Friday and Saturday in an emergency summit of the G20 to address the global finance crisis, Paulson also extended a conditional 'mea culpa' to the world.

'We in the US are well aware and humbled by our own failings and recognize our special responsibility to the global economy,' Paulson said. 'The US housing correction exposed gaping shortcomings in the outdated US regulatory system, shortcomings in other regulatory regimes and excesses in US and European financial institutions.'

But he insisted that the fundamental issue at the heart of the global crisis was 'persistent and growing global imbalances' which have fueled low interest rates, excessive risk-taking and 'a global search for return.'

'Those excesses cannot be attributed to any single nation,' he said.

For the second half of the bail-out programme, Paulson proposes to add non-banks to the list of firms being helped. The move would put more money into consumer credit sources, which provide 40 per cent of US consumer credit for car loans, student loans and credit cards.

'This market, which is vital for lending and growth, has for all practical purposes ground to a halt,' Paulson said.

One approach would be to set up a 'liquidity facility' for high- rated credit securities that would bring private investors 'back to this troubled market,' Paulson said. He was discussing the option with the Federal Reserve.

Paulson also said his department would continue to explore ways to reduce the risk of mortgage foreclosures that were the imminent root of the crisis. Since late 2006, there have been more than 3 million foreclosures, according to industry estimates. A government programme is currently helping 200,000 homeowners a month avoid foreclosure, Paulson said.