‘But, but, but … that money was only for my friends on Wall Street and not for the people.’
Henry Paulson, U.S. treasury secretary, left, and Ben S. Bernanke, chairman of the U.S. Federal Reserve, right, listen during a hearing of the House Financial Services Committee in Washington, on Nov. 18, 2008. Photographer: Jim Lo Scalzo/Bloomberg News
Nov. 18 (Bloomberg) — Treasury Secretary Henry Paulson rejected using the government’s financial-rescue program as a “panacea” for economic difficulties, clashing with lawmakers who want the funds to help beleaguered homeowners.
“The rescue package was not intended to be an economic stimulus or an economic recovery package,” Paulson said in testimony to the House Financial Services Committee in Washington. The Troubled Asset Relief Program was designed to stabilize financial markets and the flow of credit and “is not a panacea for all our economic difficulties.”
Representative Barney Frank, who heads the House panel, cut off Paulson during the question-and-answer session, saying “the bill couldn’t have been clearer” in also being aimed at reducing foreclosures. Paulson told lawmakers he has no plans to use the second half of the $700 billion program, indicating it will be up to the incoming Obama administration to resolve the matter.
“We don’t have a lot of time and I don’t usually do this,” Frank said in interrupting Paulson during an exchange on how to deploy TARP cash. “I read sections of the bill that says — write it down — give them assistance,” Frank, a Massachusetts Democrat, told the Treasury chief.
Representative Carolyn Maloney, a New York Democrat, urged using the funds “to stabilize housing,” and others on the panel emphasized the strain households are under as the economy has weakened.
Bair’s Mortgage Plan
Paulson resisted pressure from lawmakers to commit to implementing a foreclosure-prevention program proposed by Federal Deposit Insurance Corp. Chairman Sheila Bair.
“There is a balance to getting money for those who need it as opposed to those who don’t need it,” Paulson told the panel. “There’s also a balance to not providing a windfall to the banks.”
Home prices fell in four out of every five U.S. cities in the third quarter, a record spurred by nationwide foreclosure sales, the National Association of Realtors said today. The financial turmoil sparked by the collapse of the U.S. subprime mortgage market has caused $996 billion of losses for banks, lenders and insurers.
“I don’t think this is the purpose of the legislation,” Paulson said at today’s hearing. “There are other ways” to help automakers.
Federal Reserve Chairman Ben S. Bernanke told lawmakers at the hearing that using the TARP for buying stakes in banks is “critical for restoring confidence and promoting the return of credit markets to more normal functioning.” He warned that lending in the U.S. is “still far from normal.”
Paulson said it would be “extraordinarily unusual” if the government didn’t recoup the funds, and he said he expects a new push will attract privately held banks in to the TARP.
“We expect to get applications from a number of community banks, banks that are going to be very vital to this economy,” he said. “We’re expecting regulators to forward many of those applications to us, and we’re expecting to put capital in many of them.”
Bair, an appointee of President George W. Bush who has been praised by Democrats for her initiatives to help homeowners, pressed the Treasury to use its authority under the financial- rescue package to curb foreclosures.
“It is essential to utilize this authority to accelerate the pace of loan modifications in order to halt and reverse the rising tide of foreclosures that is imperiling the economy,” Bair said today in prepared remarks. She sought support for a mortgage-relief plan using TARP that she said could prevent almost 1.5 million foreclosures by the end of 2009.
Paulson, who has pledged $250 billion of TARP for buying stakes in banks, said capital injections and a “modest” contribution to a Fed program for consumer finance are the best ways to use the bailout money. Paulson has also used $40 billion to help American International Group Inc.
“We have seen that capital purchases are clearly powerful in terms of impact per dollar of investment, which is a major advantage under the current circumstances,” Paulson said today in his prepared remarks.
Frank countered that “public confidence in what we have done so far is lower than anybody would have wanted to be.” He said “there is an overwhelmingly powerful set of reasons why some of the TARP money must be used” for aiding homeowners struggling to keep their homes.
“I have reservations about spending TARP resources to directly subsidize foreclosure mitigation because this is different than the original investment intent,” Paulson said in opening remarks. “We continue to look at good proposals and are dedicated to implementing those that protect the taxpayer and work well.”
Paulson said the Treasury is also looking at ways to help insurance companies.
“We’re in the process of developing a program there,” he said. Still, he reiterated that the Treasury will not roll out another program while it is still working through the bank stakes. “It is premature to be starting another capital program,” he said.
Paulson last week abandoned his original plan for TARP, which was to purchase distressed mortgage-related assets from financial firms to unblock lending. He said today there was not enough “firepower” left in the fund to make a difference buying stakes in banks.
Some lawmakers expressed skepticism about Paulson’s new strategy and questioned whether they had been misguided.
“It appears that you seem to be flying a $700 billion plane by the seat of your pants,” Representative Gary Ackerman, a New York Democrat, said to Paulson. “It seems to be the second-largest bait-and-switch scheme that history has ever seen, second only to the reasons given to us to vote for the invasion of Iraq.”
Representative Maxine Waters, a California Democrat, reiterated her support for empowering Bair to oversee foreclosure-prevention efforts.
Bair “has been able to come up with a way by which we could do credible loan modifications and it’s been ignored,” Waters told Paulson. “You should just give her the program and let her run with it because she’s discovered how you can do these loan modifications.”
Paulson said, “I have not said no to using TARP for foreclosure mitigation,” adding “we are going to continue to evaluate and look for programs that protect the taxpayer and are effective.”
Representative Spencer Bachus defended Paulson against criticism. “I for one, Secretary Paulson, applaud you for being flexible and taking an approach that was clearly authorized by the legislation.’`
Paulson flagged efforts already under way to prevent foreclosures. Officials have made “substantial progress’` in reducing foreclosures where possible, he said.
He hailed the FDIC’s program with failed mortgage lender IndyMac Financial Corp., as well as new mortgage-servicing guidelines backed by Fannie Mae and Freddie Mac, the home-loan financers now in government-run conservatorship.
Instead of pouring money into mortgages, the Treasury seeks to set aside some of the rescue funds for shoring up the secondary market for consumer loans.
“By investing only a modest share of TARP funds in a Fed liquidity facility, we can improve securitization in this market and have a significant impact on the availability of consumer credit,’` Paulson said.
Last Updated: November 18, 2008 13:00 EST
By Rebecca Christie and Alison Vekshin