Policy Change

Paulson's Billion Dollar Policy Change

Treasury Secretary Henry Paulson announced Wednesday that the administration had decided to scrap what had originally been the centerpiece of the $700 billion economic bailout program — a plan to buy troubled assets to get them off the books of banks as a way of promoting increased lending. Instead, the administration will proceed with an alternative plan to spend $250 billion to buy stock in the banks as a way of bolstering their financial situation and accomplishing the same goal — getting the institutions to return to more normal lending. He denied that the decision had anything to do with difficulty in determining distressed mortgages from other bad assets. The plan also focuses on loans Fannie and Freddie own or guarantee, which the government has control. They are the dominant players in the U.S. mortgage market, but represent only 20 percent of delinquent loans. They are hoping that other financial institutions will follow the example of Fannie and Freddie in modifying mortgages.

"I will never apologize for changing an approach or strategy when the facts change. I think the apology should come the other way: if someone doesn't change when the facts change. I think we move quickly, we move powerfully to address the situation as it exists. The top priority has to be stability, making sure we have the resources in reserve to deal with any systemic events and make sure we have got capital to put into institutions," Paulson explained.

Paulson also announced that the Treasury and the Federal Reserve are working on a program that targets securitization. That's the process in which credit card debt, student loans and car loans are bundled together and securitized, or sold as bonds to investors, who receive monthly payments as Americans pay on their credit card bills and loans. Securitization gave millions of Americans more access to credit over the past decade. As of last year, outstanding securitized debt for credit cards, car loans and student loans was valued at almost $2.5 trillion. Now, however, investors are barely buying any securitized products, largely because securitized sub-prime mortgages have tarnished the image of anything that's packaged and pooled. He said that it was difficult since it involved lending to financial market players that weren't directly regulated by the Fed or his department.

Tim Ryan, the head of the Securities Industry and Financial Markets Association, said in a statement. "The recent turmoil has stalled large parts of this market, and restarting it will help ensure consumers get the loans they need for homes, cars and education. It is completely frozen. And if banks aren't able to access capital from the securitization markets, they are not able to lend any capital back to borrowers for farms, for cars, for homes, etc.," he said. "And so until we get that securitization process restarted, we're not going to be able to get credit flowing back to consumers in America."

Written by Katherine M