Paulson backs away from buying bad assets

Source : Business Times - 13 Nov 2008

He now favours a second round of capital injection
US Treasury Secretary Henry Paulson yesterday said he was backing away from buying troubled mortgage assets using a US$700 billion bailout fund, instead favouring a second round of capital injections into financial institutions that would match private funds.
‘Illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards,’ Mr Paulson said. ‘This is creating a heavy burden on the American people and reducing the number of jobs in our economy.’
Mr Paulson, in an update on the Treasury’s financial rescue efforts, said his staff has continued to examine the benefits of purchasing illiquid mortgage assets under the so-called Troubled Asset Relief Program.
‘Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources,’ Mr Paulson told a news conference.
When Treasury was selling the US$700 billion bailout plan to Congress, it initially promoted it as a vehicle that would purchase illiquid mortgage assets from banks and other institutions to cushion potential losses.
But it became quickly apparent that setting up such purchases would take time, and Treasury opted for the faster method of injecting capital directly into banks by buying preferred stock. The Treasury has allocated US$250 billion of the fund to such purchases so far.
Mr Paulson said the Treasury is evaluating a second programme that would provide government investments that would match private investments in capital raisings.
‘In developing a potential matching programme, we will also consider capital needs of non-bank financial institutions not eligible for the current capital programme,’ Mr Paulson said.
He announced a new goal for the programme to support financial markets, which supply consumer credit in such areas as credit card debt, auto loans and student loans.
Mr Paulson said that 40 per cent of US consumer credit is provided through selling securities that are backed by pools of auto loans and other such debt. He said these markets need support.
‘This market, which is vital for lending and growth, has for all practical purposes ground to a halt,’ Mr Paulson said.
‘We are looking at ways to possibly use the TARP to encourage private investors to come back to this troubled market, by providing them access to federal financing while protecting the taxpayers’ investment,’ he said.
The government on Tuesday sought to address complaints that not enough was being done to help Americans deal with record levels of mortgage defaults.
The Federal Housing Finance Agency, which seized control of Fannie Mae and Freddie Mac in September, announced a plan designed to speed up the process for renegotiating hundreds of thousands of delinquent loans held by the two mortgage giants.
Officials hope the new approach, which goes into effect on Dec 15., will become a model for loan servicing companies, which collect mortgage payments and distribute them to investors. These companies have been roundly criticised for being slow to respond to a surge in defaults.
The plan could have tremendous importance because Fannie Mae and Freddie Mac own or guarantee nearly 31 million US mortgages, or nearly six of every 10 outstanding. Government officials, however, did not have an estimate of how many people would qualify for the new programme. — Reuters, AP