Paulson Tells Congress Bail-Out Not Panacea for Economic Woes As Parties Clash Over Its Use

Clashing with lawmakers who want the funds to help beleaguered homeowners, Treasury Secretary Henry Paulson rejected using the government’s financial-rescue program as a “panacea” for economic difficulties. 
 
“The rescue package was not intended to be an economic stimulus or an economic recovery package,” Paulson said in testimony to the House Financial Services Committee in Washington. The Troubled Asset Relief Program (TARP) was designed to stabilize financial markets and the flow of credit and “is not a panacea for all our economic difficulties.” 
 
Barney Frank, who heads the House panel, cut off Paulson during the question-and-answer session, saying “the bill couldn’t have been clearer” in also being aimed at reducing foreclosures. Paulson told lawmakers he has no plans to use the second half of the $700 billion program, indicating it will be up to the incoming Obama administration to resolve the matter. 
 
“We don’t have a lot of time and I don’t usually do this,” Frank said in interrupting Paulson during an exchange on how to deploy TARP cash. “I read sections of the bill that says -- write it down -- give them assistance,” Frank, a Massachusetts Democrat, told the Treasury chief. 
 
Representative Carolyn Maloney, a New York Democrat, urged using the funds “to stabilize housing.” 
 
Democrats are also pursuing legislation to deploy part of the TARP to prevent General Motors Corp., Ford Motor Co. and Chrysler LLC from collapsing due to a lack of cash. 
 
No Money for Autos 
 
“I don’t think this is the purpose of the legislation,” Paulson said at today’s hearing. “There are other ways” to help automakers. 
 
Federal Reserve Chairman Ben S. Bernanke told lawmakers at the hearing that using the TARP for buying stakes in banks is “critical for restoring confidence and promoting the return of credit markets to more normal functioning.” He warned that lending in the U.S. is “still far from normal.” 
 
Federal Deposit Insurance Corp. Chairman Sheila Bair, an appointee of President George W. Bush who has been praised by Democrats for her initiatives to help homeowners, also differed with Paulson. 
 
“It is essential to utilize this authority to accelerate the pace of loan modifications in order to halt and reverse the rising tide of foreclosures that is imperiling the economy,” Bair said today in prepared remarks. She sought support for a mortgage-relief plan using TARP that she said could prevent almost 1.5 million foreclosures by the end of 2009. 
 
Consumer Finance 
 
Paulson, who has pledged $250 billion of TARP for buying stakes in banks, said capital injections and a “modest” contribution to a Fed program for consumer finance are the best ways to use the bailout money. Paulson has also used $40 billion to help American International Group Inc. 
 
“We have seen that capital purchases are clearly powerful in terms of impact per dollar of investment, which is a major advantage under the current circumstances,” Paulson said today in his prepared remarks. 
 
Frank countered that “public confidence in what we have done so far is lower than anybody would have wanted to be.” He said “there is an overwhelmingly powerful set of reasons why some of the TARP money must be used” for aiding homeowners struggling to keep their homes. 
 
“I have reservations about spending TARP resources to directly subsidize foreclosure mitigation because this is different than the original investment intent,” Paulson said in opening remarks. “We continue to look at good proposals and are dedicated to implementing those that protect the taxpayer and work well.” 
 
Original Plan 
 
Paulson last week abandoned his original plan for TARP, which was to purchase distressed mortgage-related assets from financial firms to unblock lending. He said today there was not enough “firepower” left in the fund to make a difference buying stakes in banks. 
 
“It amazes me” that the Treasury eliminated its original proposal, Representative Maxine Waters, a California Democrat said today. “I could not believe it.” 
 
Waters reiterated her support for empowering Bair to oversee foreclosure-prevention efforts. The FDIC chairman “has discovered how to do these loan modifications,” she said. 
 
‘I have not said no to using TARP for foreclosure mitigation,” Paulson responded to Waters. 
 
Paulson flagged efforts already under way to prevent foreclosures. Officials have made “substantial progress” in reducing foreclosures where possible, he said. 
 
He hailed the Federal Deposit Insurance Corp.’s program with the failed IndyMac Bancorp., as well as new mortgage-servicing guidelines backed by Fannie Mae and Freddie Mac, the home-loan financers now in government-run conservatorship. 
 
Instead of pouring money into mortgages, the Treasury seeks to set aside some of the rescue funds for shoring up the secondary market for consumer loans. 
 
“By investing only a modest share of TARP funds in a Fed liquidity facility, we can improve securitization in this market and have a significant impact on the availability of consumer credit,” Paulson said.