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Bailout Effort Shifts Course

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The Associated Press

Published: November 13, 2008

WASHINGTON - Urgently shifting course, the Bush administration is abandoning the centerpiece of its massive $700 billion economic rescue plan and exploring new ways to shore up not only banks but also credit-card, auto-loan and other huge nonbank businesses. "The facts changed and the situation worsened," Treasury Secretary Henry Paulson said at a news briefing, explaining the administration's switch from its original plan to help financial institutions by buying up troubled assets, primarily securities backed by bad home loans.

"Our system is stronger and more stable than just a few weeks ago," he said.

He cautioned that much more needs to be done before the economy can turn the corner.

To accomplish those goals, Paulson said the administration would continue to use $250 billion of the $700 billion rescue fund to make direct purchases of bank stock as a way of supplying hundreds and potentially thousands of banks with extra capital in hopes that they will resume more normal lending.

Paulson said the administration had decided that the original focus of the bailout program, the purchase of distressed mortgage-backed securities and other troubled assets on the books of banks, would not be employed.

He said the administration had changed the emphasis because of a need to get money into the financial system much more quickly because of a worsening credit crunch. Setting up a purchase program for the bad assets was taking too much time, officials said.

Lawmakers applauded Paulson's switch, saying the administration was finally recognizing that its initial plan was flawed.

"I am glad that Secretary Paulson and the rest of the Treasury team have finally seen the light," said Sen. Charles Schumer, D-N.Y. He said he would still like to see more strings attached to make sure banks use their bailout money to increase loans.

Paulson also said the administration was exploring the possibility of setting up a program in conjunction with the Federal Reserve that would provide support for the $1 trillion market in securities that fund such vital consumer products as credit cards, auto loans and students loans. About 40 percent of consumer credit is supplied through the sale of these securities that are backed by payments consumers make on their credit cards and other loans.

"This market, which is vital for lending and growth, has for all practical purposes ground to a halt," Paulson said. In response to a question, he said it would take weeks to design a program, which officials suggested might involve having the Federal Reserve provide loans.

The administration has already spoken for all but $60 billion of the initial $350 billion supplied by Congress, including the $250 billion for direct stock purchases from banks and $40 billion for a new loan to help stabilize American International Group.

U.S. MAY BUY STAKE IN AUTOMAKERS

Congressional Democrats are pushing legislation to send $25 billion in emergency loans to the beleaguered auto industry in exchange for a government ownership stake in the Big Three car companies.

House Speaker Nancy Pelosi, D-Calif., and Senate Majority Leader Harry Reid, D-Nev., hope for quick passage of the auto bailout during a postelection session that begins Monday.

The Associated Press

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