12 November 2008

U.S. Financial Rescue Works but Needs Refinement, Paulson Says

Buying up bad securities not viewed as an effective option

U.S. Treasury Secretary Henry Paulson speaks on the financial rescue plan as the financial system shows signs of improvement.

By Andrzej Zwaniecki
Staff Writer

Washington — U.S. Treasury Secretary Henry Paulson says the U.S. and global financial systems have improved in recent weeks, but the challenges faced by U.S. credit markets require a revised approach from the government.

“Our system is stronger and more stable than just a few weeks ago” as a result of steps taken by governments and central banks around the world, Paulson said November 12.

However, he said, the system remains fragile in the face of a significant economic downturn and the weak positions of financial institutions that have many troubled assets on their balance sheets.

The treasury secretary reviewed the progress in implementing the $700 billion financial rescue plan and announced a change in its focus.

He said the administration will continue to use the remaining portion of the initial $250 billion to purchase stock in banks as a way of encouraging them to increase their lending.

The same day U.S. banking regulators issued a joint statement that calls for all U.S. banks to resume lending to creditworthy borrowers, consider paying out dividends only if they have strong capital positions, and pursue executive compensation policies “aligned with the long-term prudential interests of the institution.”

Some lawmakers and analysts have expressed concern that banks participating in the stock-purchase program may use the money to finance takeovers and hefty compensation packages for their executives rather than for lending.

The regulators threatened an unspecified action against banks whose dividend policies are found to be inconsistent with sound capital and lending policies.

Paulson said it will take time for markets and institutions to “absorb” new policies implemented in a short period.

But he said his department has revised the rescue program’s targets in response to changing financial and economic conditions. He all but excluded purchasing bad mortgage-backed securities, an option viewed as the best approach to the financial crisis at the time the financial rescue bill — the Troubled Assets Relief Program (TARP) — was enacted in the beginning of October.

“Our assessment at this time is that this is not the most effective way to use TARP,” Paulson said.

Instead, he said, the administration is considering supporting credit markets outside the banking system, such as auto loans and student loans, which together with credit card loans constitute 40 percent of U.S. consumer credit. He said these loans are increasingly hard to get and their costs are rising.  Other options include reducing the risk of foreclosure and providing matching funds to banks able to raise capital on their own.

However, Paulson ruled out the possibility of using the financial rescue funds to help struggling U.S. automakers unless Congress changes the related law.

“But the solution has got to be one that leads to viability [of the U.S. auto industry]," he said.

On November 11, in a separate action, the administration announced a plan to aid homebuyers who have difficulty keeping up with mortgage payments.

A transcript of Paulson’s remarks is available on the Treasury Department Web site, and the banking regulators’ statement is on the Federal Reserve Web site.