67
WASHINGTON — The U.S. government has abruptly scrapped a plan to buy up toxic mortgages in the latest metamorphosis of its troubled $700-billion (U.S.) bank rescue.
The change of plan helped send the Dow Jones industrial average tumbling more than 411 points Wednesday to 8,282.66 as investors fretted that authorities still don't have a grip on the credit crisis.
Less than two months ago, U.S. Treasury Secretary Henry Paulson assured Americans the purchase plan was a bold and cheap way to get credit flowing to consumers and businesses.
He's now apparently just as convinced there are far better ways to spend the government's cash – mainly by injecting capital directly into banks as well as bolstering the broader consumer credit market.
“I will never apologize for changing an approach or a strategy when the facts change,” he told reporters in Washington. “Apologies should come the other way – if someone doesn't change when the facts change.”
Even the program's formal name – the Troubled Asset Relief Program, or TARP – doesn't fit any more because mortgage assets are no longer the focus.
The dramatic about-face comes as a stampede of lobbyists has descended on Washington.
Insurers, credit card companies, auto finance agencies, home contractors and auto makers are among the many interest groups seeking a piece of one of the largest government handouts in history.
“What was supposed to be a narrow and limited attempt to reduce the systemic risk of a financial collapse has become a taxpayer-funded free-for-all,” said Barry Ritholtz, director of equity research at FusionIQ.
Democratic leaders in the House of Representatives are pushing the Bush administration to use part of the fund to shore up the depleted cash reserves of the ailing Detroit Three auto makers. And the House banking committee has scheduled hearings on the issue next week.
Mr. Paulson is so far resisting, saying TARP's main intent is to “deal with the financial industry.”
He didn't close the door entirely to a bailout for Detroit. “We need a solution, but the solution has got to be one that leads to viability [for the auto makers],” he said.
Mr. Paulson explained that buying up troubled mortgage-related assets was a “valid concept.” But in the weeks since U.S. President George W. Bush signed the TARP on Oct. 3, Mr. Paulson said he realized the plan would take too long to implement and wouldn't address “the severity of the problem.”
Among the thorny issues was how to price the value of mortgages and mortgage-backed securities that didn't have a market because of plunging real estate prices. The plan was to use so-called reverse auctions in which firms would offer securities at various prices to the Treasury Department. But officials were vague about how it would work, without leaving the government with worthless assets.
“From the beginning, it was unclear how the reverse auction process would be implemented,” said Michael Feroli, an economist at JPMorgan.
Mr. Feroli pointed out that the Treasury Department has now subtly shifted its focus from mortgages to the broader consumer credit industry, and that could require a lot more than the $250-billion so far allotted to the capital injection program.
Mr. Paulson said the administration is looking at ways to shore up the markets that support credit card debt, auto loans and student loans. He noted that 40 per cent of consumer credit is generated through selling securities backed by pools of auto loans and similar debt.
“This market, which is vital for lending and growth, has for all practical purposes, ground to a halt,” Mr. Paulson said.
Mr. Paulson also said he was looking at attracting matching investments of private capital into the equity purchase program.
The Treasury Department's evolving plans for the TARP also don't sit well with House Republicans, who demanded more details about the administration's plans for the money.
“Transparency is even more important now, given that the program appears to have been implemented in some ways that were given little or no discussion as Congress was being urged to pass the rescue plan,” House Republican leader John Boehner said.
