Paulson Stays the Course on Financial Rescue Plan

Posted by: Theo Francis on December 01

In remarks to executives gathered for the Fortune 500 Forum in Washington, D.C., Treasury Secretary Henry Paulson broke no news, but he did give more hints about what is — and isn’t — likely in the waning weeks of his tenure.

For one thing, he didn't budge on mortgage-modification. For weeks, Democrats in Congress have pushed the Treasury to implement a plan directly assisting homeowners in the face of foreclosure -- perhaps one along the lines recently proposed by Federal Deposit Insurance Corp. Chairwoman Sheila Bair.

Paulson has steadfastly resisted, on the one hand telling the lawmakers that their bill wasn't intended to aid homeowners in the way they want him to; on the other saying it wouldn't be a wise use of federal funds.

This afternoon, again, he called the housing crunch the "root" of the financial crisis, but blandly declared that the agency's staffers "continue to examine appropriate foreclosure mitigation" programs. (See his prepared remarks.)

When an audience member asked why he opposed Bair's plan, he responded, "I don't think that I'm opposed to any plan." As before, he said it's "difficult" to design a plan that doesn't help speculators or homeowners who don't need it, or those who would get help under the various voluntary programs in place.

He alluded to developing new programs to tackle various aspects of the financial crisis, including unspecified ways to improve consumer lending (beyond last week's announcement) to help the Fed buy mortgage-backed securities and lend to investors holding highly rated consumer debt.

But he also hinted that, perhaps, nothing new is planned before President-Elect Barack Obama takes office Jan. 20 -- and that he may still want to leave some of the remaining bailout funds for his successor, Timothy Geithner, who is already intimately involved in the bailout so far. Specifically, Paulson said the Treasury "will discuss [any new programs] with the Congress and the next administration" when the new plans are ready, and that the agency "also maintain flexibility and firepower for this administration and the next."

He did use somewhat stronger language to exhort banks to lend with the capital the Treasury has invested in them. "We expect banks to increase their lending as part of these efforts, and it is important that they do so," he said, reiterating that federal banking regulators had said much the same in recent weeks. Congressional Democrats have criticized him for not actually requiring banks to lend out the capital they received.

Paulson has said that banks would be under shareholder pressure to lend the funds to prevent a slide in the institutions' return on capital; banking analysts have questioned the reasoning, saying shareholders are currently more concerned about a bank's solvency than their returns.

In response to another question, Paulson said it wasn't a big surprise that the National Bureau of Economic Research had declared the economy in recession since December 2007. He said he and others figured the economy had slowed seriously, and "I think the American people have known that for some time."

He grew a little introspective toward the end, asked what lessons he and others could draw from origins of the crisis, and where he would draw the line on interfering in the free markets. He cautioned against drawing conclusions about the causes too soon, before the worst was over and a thorough analysis was possible, and he said some of what he has done would have seemed unthinkable a year earlier.

Looking ahead, he reiterated his earlier calls for a "systemic" regulator that can look across industries to spot threats to the financial system as a whole, some kind of federal hedge-fund charter that would let regulators keep an eye on the massive investment pools, and market structures for trading and monitoring credit default swaps and financial derivatives.

And, even as the federal bailout is fostering massive consolidation in the banking industry, he warned against allowing massive financial firms to imperil the economy. "We need to get to a place in this country where no institution is too big or too important to fail," he said.

But he said he wouldn't rule out any particular federal intervention. Until the crisis is past, "you're not going to get me to say never," he said. A year ago, "I would have drawn the line in a different place" than he might today.

He concluded: "It's our fault that we let the system get so out of balance that it took a crisis like this to get us to figure out how to get it back in balance again."

Reader Comments

Bill Young

December 2, 2008 12:59 AM


Will someone please inform Mr Paulson that it is the disintegration of the residential mortgage market that is destroying the value of the assets he is trying to prop up?

Until their decline is stanched, more and more money will be required to shore up the bank's capital.

Perhaps it is the Calvinist streak in many conservatives, you know, you should not give blanket assistance to blocks of people because some may be unworthy, having been shorted by god because they were not pius enough?

MikeyC

December 4, 2008 10:24 AM

You never know what goes on in the minds of powerful politicans. Especially when they create something like this bailout fiasco. All I know is that because of their stupidity and the constant screaming from the media, us small business owners have been suffering. We must keep our hopes that the consumer will see beyond this crap and get back to living life. Until the feds understand that it is the people and entrepreneurs and risk takers that built this nation are the ones that keep this economy running and not them, then will we survive. On the mortgage mess, I have probably 10,000 customers I've sent emails to asking them if they are giving up their homes. Answer: none. If you look at years past, you will always see forclosiures. My Dad, way back in 1964, had his home foreclosed and car repoed because of an accident that put him in the poor house. I've lost one home and had several reposssesions while building my business in the last 30 yrs. The f'd up fat asses down at the banks would not help when I really needed it. But I stayed on course and now they want me to loan them money, WTF!
A financial crisis is nothing new from where I stand.
The thing is we gotta quit believing in a government run system and asking the feds for help when we can actually do it on our own. If just a small percentage of this country would quit whining everytime something goes wrong woth the system and stand on their own two legs, we might be much better off than it is now.
Survive - Function - Thrive...VROOM!

Thank you for your interest. This blog is no longer active.

 

Election 2008

Washington Bureau Chief Jane Sasseen and other BusinessWeek writers cover the run-up to the Nov. 4 presidential election, paying close attention to how the candidates will handle issues such as housing, the economy, unemployment, and immigration.

BW Mall - Sponsored Links

Buy a link now!