Treasury May Bail Out Credit Card, Other Loan Industries, Paulson Says
November 12, 2008 - 8:06 PMTreasury Secretary Henry Paulson on Wednesday announced that the federal government no longer plans to buy troubled mortgage-related assets from private banks but will expand the scope of its Troubled Asset Relief Program (TARP) to include non-bank financial and credit institutions.
The announcement came the same day it was reported that credit card giant American Express needs $3.5 billion in federal assistance to stay afloat.
Paulson, briefing reporters on the future of the federal bailout effort, said that while the financial system had been stabilized, more action would be required to prevent further troubles.
“Although the financial system has stabilized, both banks and non-banks may well need more capital given their troubled asset holdings, projections for continued high rates of foreclosures, and stagnant U.S. and world economic conditions,” he said.
Paulson said in addition to purchasing more equity from banks, Treasury was developing plans to give federal aid to consumer credit agencies and to use its leverage to reduce mortgage foreclosures.
“Approximately 40 percent of consumer credit is provided through securitization of credit card receivables, auto loans, and student loans,” he said.
“Today the illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans, and credit cards,” a fact which makes federal assistance necessary, he said.
“We are examining strategies to mitigate mortgage foreclosure,” Paulson added, suggesting that such strategies would be based on the model developed during the federal seizure of IndyMac – the California-based bank taken over by federal regulators in July.
Paulson also announced that Treasury no longer plans to buy troubled mortgage-related assets from private banks – a move which the secretary admitted had been the original intent of the bailout.
“We asked for $700 billion to purchase troubled assets from financial institutions,” he said.
However, due to what Paulson described as a “considerably” more troubled financial market, Treasury has abandoned that goal.
“We are not planning to purchase illiquid mortgage assets,” he said.
Paulson said the Treasury Department would work on other plans to “induce” mortgage modifications, plans that would require direct federal spending.
“There has been significant work to design and evaluate a number of proposals to induce further (mortgage) modification,” Paulson said. “Each of these would, however, require substantial government subsidies.”
This new spending would be unlike current bailout efforts, he said, because it would involve direct spending and not an investment of taxpayers’ funds.
“We must be careful to distinguish this type of assistance, which essentially involves direct spending, from the type of investments that are intended to promote financial stability, protect the taxpayer, and be recovered under the TARP legislation.”
In a related story, Paulson said the bailout law gives him "broad authority" to purchase troubled financial instruments, and that there apparently is no limit to that authority except congressional oversight. For the report, click here.