US drops toxic assets bailout

US Treasury Secretary Hank Paulson has committed a dramatic volte face from the Bush administration’s Wall St bailout plan to purchase toxic subprime mortgages from financial firms.

Mr Paulson announced he is refocusing on shoring up financial institutions with direct investments, shoring up markets for securitized consumer debt such as car loans, student loans and credit cards, as well as prodding banks to speed up the thaw in the country’s credit system.

“Our assessment at this time is that this is not the most effective way to use Tarp funds,” Mr Paulson said at a news conference, while stressing that he and others working on the bailout have not ruled out “targeted forms of asset purchase.”

Pressed to explain why he had changed his mind so soon after asking Congress to back asset purchases, he said: “The situation worsened, the facts changed.”

“During times like these with a slowing economy and some deterioration in credit conditions, even the healthiest banks tend to become more risk-averse and restrain lending, and regulators’ actions have reinforced this lending restraint in the past,” Mr. Paulson said.

But, he added pointedly in the direction of major banks, with their financial foundations already shored up by recent government support, “our banks will be more confident and better positioned to play their necessary role to support economic responsibility.”

The change in focus disappointed Wall Street brokers (no doubt looking forward to the government money) sending stocks tumbling sharply, with the Dow Jones down 3.5 percent on additional concerns about the scope of the U.S. economy's troubles and shareholder dilution in the financial sector.

Mr. Paulson pledged to intensify government actions to help homeowners, saying he and his aides were “examining strategies to mitigate” foreclosures.

But while he said the US auto industry was a “critical” one, he sidestepped any offer of cash for Detroit, saying any government aid for the sickly industry would not come from the $700 billion as the purpose of the program was to provide financial stability.

A separate $25 billion loan program was approved in September to help carmakers develop fuel-efficient vehicles.

The Treasury secretary also raised the possibility of the government investing in non-bank financial firms as well as banks in the second round of capital injections.

“In developing a potential matching program, we will also consider capital needs of nonbank financial institutions not eligible for the current capital program; broadening access in this way would bring both benefits and challenges”, he said.

Mr Paulson signalled Treasury would not rush the second round of recapitalisation, which may not take place until the next administration takes office. “Before embarking on a second capital purchase programme, the first one must be completed, and we have to assess its impact,” he said.