Paulson Says He’s ‘Preserved Flexibility’ for Obama Administration
November 18, 2008 - 9:19 AMTreasury Secretary Henry Paulson wants President-elect Barack Obama and the new Congress to give the federal government broad new authorities to take over any failing financial institution, not just banks, the Washington Post reported.
Paulson, once a “skeptic of government meddling,” has “engineered a series of massive federal intrusions into the markets while persuading reluctant bank executives and influential politicians to fall in behind him,” the newspaper said.
According to the Post, Paulson is about to unveil proposals urging President-elect Barack Obama and the new Congress to give the federal government broad new authorities to take over any failing financial institution, not just banks.
In an op-ed in Tuesday's New York Times, Paulson describes the current financial crisis as "more severe and unpredictable than any in our lifetimes," and he defends his decision to abruptly shift how the bailout money will be used. (Congress is expected to press him on the latter point.)
He also indirectly confirmed reports that he will reserve $350 billion of the $700 billion in congressionally authorized bailout funds for the Obama administration to spend as it sees fit.
As Paulson put it, "We have preserved the flexibility of President-elect Barack Obama and the new secretary of the Treasury to address the challenges in the economy and capital markets they will face."
The op-ed is a preview of what Paulson is expected to tell lawmakers when the House Financial Services Committee grills him on Tuesday.
In the op-ed, Paulson writes that he originally intended to strengthen the banking system by purchasing bad mortgages and mortgage-backed securities of banks and financial institutions. That's what he told Congress he would do when he asked for the emergency “rescue” funds.
"But the severity and magnitude of the situation had worsened to such an extent that an asset purchase program would not be effective enough, quickly enough,” Paulson wrote. “Therefore, exercising the authority granted by Congress in this legislation, we quickly deployed a $250 billion capital injection program, fully anticipating we would follow that with a program for buying troubled asset."
Lacking a “playbook” for such an unprecedented crisis, Paulson said he adjusted his strategy, “always keeping focused on our goal: to stabilize a financial system that is integral to the everyday lives of all Americans."
Not enough money
According to Paulson, "A troubled-asset purchase program, to be effective, would require a huge commitment of money. In mid-September, before economic conditions worsened, $700 billion in troubled asset purchases would have had a significant impact. But half of that sum, in a worse economy, simply isn’t enough firepower," he added.
"We decided it was prudent to reserve our TARP money, maintaining not only our flexibility, but also that of the next administration."
Paulson said the $250 billion the federal government has used to buy bank stocks “is strong medicine for our financial institutions.” Paulson said the capital injections allows banks to absorb losses as they write down or sell troubled assets. “And stronger capitalization is essential to increasing lending, which is vital to economic recovery."
Paulson emphasized that the financial bailout legislation was intended to stabilize the financial system. "It is not a panacea for all our economic difficulties," he said. He also said an economic recovery will happen much faster because of the financial bailout program.
“I am very proud of the decisive actions by the Treasury Department, the Federal Reserve and the F.D.I.C. to stabilize our financial system,” Paulson wrote. “We have done what was necessary as facts and conditions in the market and economy have changed, adjusting our strategy to most effectively address the crisis. We have preserved the flexibility of President-elect Barack Obama and the new secretary of the Treasury to address the challenges in the economy and capital markets they will face.”
Paulson said the nation’s banking system is “significantly more stable” than it was. And as Congress moves forward, “the failure of a major bank is no longer a pressing concern,” he said.