Paulson's Explanation Leaves More Questions

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19, Neel Kashkari, the interim Assistant Treasury Secretary who is overseeing the financial rescue program, elaborated a bit more on the agency's change of heart. Even as Treasury officials continued to plan for asset purchases, he said, they realized that the continued deterioration of the markets meant that they might not have enough funds to do both. "We were keenly aware that, while $700 billion is a large sum of money, it is a finite amount," Kashkari said. "We needed to use the available funds to provide the maximum benefit to the system, while leaving enough dry powder to deal with contingencies."

Treasury Rethinks Its Approach

With plans already under way to use roughly half of the $700 billion on capital injections for the banks and AIG, as well as an expanding list of consumer finance firms, insurers, and others who are clamoring to be allowed to apply, Kashkari says they concluded that they may also need more capital for both banks and nonbank financial institutions. "With about half the original $700 billion available for asset purchases, would such a program be the best approach?" he says they began to ask within Treasury. "For an asset purchase program to be effective, it must be done on a very large scale."

By mid-November, Paulson concluded the remaining funds were not enough, and signaled that he would not ask Congress to release the next tranches of $350 billion in funding. Instead, he plans to leave the decision over how those funds should be used to the incoming Obama Administration.

While all true, that explanation has engendered more than a dollop of skepticism. "I don't think the markets deteriorated so rapidly in those two weeks that they warranted any different approach than previously," says Karen Shaw Petrou, the head of research firm Federal Financial Analytics. Moreover, several congressional aides ask if conditions had changed that much while negotiations dragged on, why didn't Paulson make that clear to Congress? That shift has caused widespread frustration in Congress, particularly as it leaves the Treasury with little leverage to push banks and mortgage servicers to speed up the modification of loans.

Auto Industry Wants In

Many believe the bill would never have garnered enough Democratic votes to pass without the emphasis on tackling the core foreclosure issue. In the Nov. 18 hearings, Representative Maxine Waters (D-Calif.) complained that she worked hard to win the votes of other members who were suspicious of the program by assuring them that homeowners would be directly helped by it. "I come here very troubled about the direction Secretary Paulson has taken," she said.

And in a meeting with Pelosi and Senate Majority leader Harry Reid the night before the hearing, the pair made clear the need for more action on housing. "They read him the riot act," says one Democratic aide.

Now, with auto company executives pleading for access to the Treasury funds, it's harder for Paulson & Co. to argue that such investments stray from the core mission of the bailout. That mission, after all, has proved to be mutable.

Sasseen is Washington bureau chief for BusinessWeek. With Theo Francis.