Treasury Secretary Henry Paulson today said that buying troubled assets will no longer be the focus of the financial rescue package.
In his speech, the secretary said, " It was clear to me by the time the bill was signed on Oct. 3 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 that after some consultation with the Federal Reserve, he determined that the most timely as well as effective way to improve credit market conditions was to strengthen bank balance sheets quickly through direct purchases of equity in banks.
"Of course, before that time, the only instances in which Treasury had taken equity positions was in rescuing a failing institution," Paulson said. According to the Secretary, both the preferred stock purchase agreement for Fannie Mae and Freddie Mac, as well as the Federal Reserve's secured lending facility for American International Group came with considerable taxpayer protections and conditions, he said.
Paulson added that as they planned a capital purchase plan to support the overall financial system by strengthening balance sheets of a broad array of healthy banks, the terms had to be made so that broad participation was encouraged and balanced to make sure that the appropriate taxpayer protection was upheld and it would not impede private capital flow.
In his remarks, Paulson also talked about examining strategies to support consumer access to credit outside the banking system. He noted that to date, the Fed, Federal Deposit Insurance Corp. and Treasury programs have been focuse on the U.S. banking system, and the non-bank consumer finance sector continues to face difficult funding issues.
He specifically mentioned that the ABS market has played a critical role for many years in lowering the cost and increasing the availability of consumer finance. He added that this market is now in distress, costs of funding have skyrocketed and new-issue activity has stopped. Currently, the sector's illiquidity is raising the cost and limiting the availability of car loans, student loans and credit cards. "This is creating a heavy burden on the American people and reducing the number of jobs in our economy," Paulson said.
With the Federal Reserve, the Treasury is currently exploring the development of a potential liquidity facility for highly-rated triple-A ABS.
"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," Paulson said. "By doing so, we can lower costs and increase credit availability for consumers. Addressing the needs of the securitization sector will help get lending going again, helping consumers and supporting the U.S. economy."
He added that although this securitization effort is targeted at consumer financing, the program they are currently evaluating might also be used to support new commercial and residential mortgage-backed securities lending.