Paulson Confirms Bailout Shift From Buying Troubled Assets To Injecting Liquidity

Everyone saw it happening, but today U.S. Treasury Secretary Henry Paulson confirmed that they have abandoned the original plan of the $700 billion bailout approved by Congress, which was to buy troubled assets, and instead focused on direct purchases of equity in banks.

Paulson said that during the two weeks that Congress considered the legislation, market conditions worsened considerably and it became clear to him that purchasing troubled assets would take too much time to implement and would not be sufficient given the severity of the problem.

Paulson stressed how quickly the money given in the Capital Purchase Plan was transferred into the banks, saying by October 26th, eight days after the plan was announced, $115 billion was out the door to eight large institutions.

Paulson said that although the program's primary purpose is stabilizing our financial system, banks must also continue lending.

Paulson also commented on priorities for the remaining TARP funds, saying, "We have evaluated options for most effectively deploying the remaining TARP funds, and have identified three critical priorities. First, we must continue to reinforce the stability of the financial system, so that banks and other institutions critical to the provision of credit are able to support economic recovery and growth. Although the financial system has stabilized, both banks and non-banks may well need more capital given their troubled asset holdings, projections for continued high rates of foreclosures and stagnant U.S. and world economic conditions. Second, the important markets for securitizing credit outside of the banking system also need support. Approximately 40 percent of U.S. consumer credit is provided through securitization of credit card receivables, auto loans and student loans and similar products. This market, which is vital for lending and growth, has for all practical purposes ground to a halt. Addressing these two priorities will have powerful impacts on the overall financial system, the strength of our financial institutions and the availability of consumer credit. Third, we continue to explore ways to reduce the risk of foreclosure."

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