Paulson Shifts Focus of Rescue to Consumer Lending

By John Brinsley and Robert Schmidt

Nov. 12 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson plans to use the second half of the $700 billion financial rescue program to help relieve pressures on consumer credit, scrapping an effort to buy devalued mortgage assets.

``Illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards,'' Paulson said today in a speech at the Treasury in Washington. ``This is creating a heavy burden on the American people and reducing the number of jobs in our economy.''

His remarks are an acknowledgement that the pitch he made to Congress for the bailout hasn't delivered what was promised. Paulson sold the Troubled Asset Relief Program as a way to rid bank balance sheets of illiquid mortgage assets, and he may encounter resistance from Congress for the remaining $350 billion after using most of the first half to buy bank stakes.

Lawmakers will ``put his feet to the fire,'' said Kevin Petrasic, a former official at the Office of Thrift Supervision, now an attorney with the Paul, Hastings, Janofsky & Walker law firm in Washington. ``I'm not sure how you get around dealing with what is clearly the congressional intent.''

Charles Grassley of Iowa, ranking Republican on the Senate Finance Committee, said the shift makes ``you wonder if they really know what they're doing.'' Grassley, in a letter to Paulson and Federal Reserve Board Chairman Ben Bernanke, raised the possibility Congress could block appropriation of the remaining $350 million under the rescue package.

``Congress can act any time to revoke the Treasury's authority,'' Grassley said. ``They will be watched and they will be questioned.''

No Apologies

Paulson said he has no regrets for the revised plan. ``I will never apologize for changing a strategy or an approach if the facts change,'' he said.

Treasury and Federal Reserve officials are exploring a new ``facility'' to bolster the market for securities backed by assets, Paulson said, adding that the program would be ``significant in size.'' Officials are considering using a portion of the bailout money to ``encourage private investors to come back to this troubled market,'' he said.

The Treasury chief said the department is also considering having companies that accept new taxpayer funding get matching private capital. Buying ``illiquid'' mortgage-related assets -- the reason the program was established a month ago -- is no longer being considered, he said.

``We will continue to examine whether targeted forms of asset purchase can play a useful role,'' he said.

Initial $350 Billion

Paulson has committed all but $60 billion of the initial $350 billion allocated by Congress to take equity stakes in banks and in insurer American International Group Inc. Lawmakers, who could reject Treasury requests for the remaining $350 billion, are pushing for aid to automakers including General Motors Corp. Paulson is resisting.

House Financial Services Committee Chairman Barney Frank today proposed giving General Motors Corp., Ford Motor Co. and Chrysler LLC $25 billion in loans from the Treasury rescue fund.

``A collapse of the American automobile industry would be the worst possible thing that could happen at a time when we are already weakened,'' Frank, a Massachusetts Democrat, said in an interview on Bloomberg Television. He also said he disagreed with Paulson's decision to forgo buying bad assets.

``That was an important part of the way we sold the program, and I think he's making a mistake,'' Frank said.

Manufacturing Industry

Automakers ``are a key part of our manufacturing industry and manufacturing is critical,'' Paulson said in response to a question after his prepared remarks. ``We need a solution, but the solution has got to be one that leads to viability.''

Paulson said he has no timeline for notifying Congress of his intent to use the remaining TARP funds, and reiterated that he's ``comfortable'' that $700 billion is ``what we need'' to stabilize the financial system.

With less than three months left in the Bush administration, demands for assistance from foundering companies will likely escalate. The Treasury two days ago took a $40 billion stake in AIG. American Express Co. this week converted into a bank-holding company, making it eligible for funds.

President-elect Barack Obama, who takes office on Jan. 20, last week said his economic team will ``review the implementation'' of the rescue plan, suggesting he may have different priorities for its use.

Transition Team

Paulson said today he met with a member of the incoming president's transition team as well as someone ``who is going to have responsibility'' for the program after the end of the Bush administration.

The Treasury chief and his team have decided to stick with the success they've had with the capital injection program, rather than try to deal with setting up the asset purchases before the change in administration, said Martin Regalia, chief economist at the U.S. Chamber of Commerce in Washington.

``It's going to be the next guy's issue,'' he said. ``At this point, they're just trying to make sure the pieces don't come apart at the seams.''

Some lawmakers are also calling for greater oversight over use of the funds. Senator Charles Schumer of New York today reiterated his calls for Paulson to require banks taking public capital to increase lending rather than use the money to finance takeovers.

``The TARP really gave no incentive for the banks to lend the money, carrot or stick, and that's a big problem,'' he said on a conference call with reporters.

To contact the reporter on this story: John Brinsley in Washington at jbrinsley@bloomberg.net; Robert Schmidt in Washington at rschmidt5@bloomberg.net