Treasury Redefines Its Rescue Program
Thursday, November 13, 2008
Treasury Secretary Henry M. Paulson Jr. announced a series of moves yesterday that redefine the federal government's $700 billion rescue plan for the financial industry in order to tackle what he called a dire situation in the consumer credit markets.
In recasting the program, the Treasury no longer plans to buy troubled assets from financial firms, the idea initially presented to the country, but instead will offer aid to banks and other firms that issue student, auto and credit card loans in part by jump-starting the market that provides financing for these companies.
"This market . . . has for all practical purposes ground to a halt," Paulson said at a news briefing. "Today, the illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards. This is creating a heavy burden on the American people and reducing the number of jobs in our economy."
In recent years, sales of securities provided the funding for 40 percent of consumer loans, Paulson said. Lenders issued $42.5 billion worth of such securities last October. This October, they issued less than 2 percent of that amount.
The volume of car loans, for example, declined 6 percent in the third quarter compared with the corresponding period last year, according to the Federal Reserve. Average interest rates on car loans almost doubled from July to September -- the most recent month for which data are available -- and borrowers were required to make much larger down payments, an average of $2,000 more down on a $20,000 car.
And without the ability to borrow money, lenders that provide private student loans have been raising rates or have stopped issuing them altogether. Of the 60 major lenders in the business, 37 have dropped out.
Paulson said the Treasury's bailout effort, called the Troubled Asset Relief Program, should not be spent helping ailing Detroit automakers or homeowners facing foreclosure because that would violate the intent of the initiative but that they deserved help in other forms.
"I don't think TARP should be a place people look to whenever there's an economic issue," Paulson said in an interview yesterday evening. "We ought to keep our eyes on what the purpose of the TARP is, which is the stability of the financial system."
The steps unveiled yesterday are Paulson's latest effort at using the bailout to support lending by making capital investments in an ever-widening array of firms in return for ownership stakes. So far, the government has allocated $250 billion of the Treasury package for banks and $40 billion more for insurance giant American International Group.
If the Treasury's new initiative succeeds in increasing the availability of consumer credit, it would probably give a huge boost to the nation's automakers by ensuring that car buyers could find loans. But Paulson added that automakers won't be helped at all in the absence of a plan to make the industry viable.
Congressional leaders immediately expressed their disappointment with his announcement. But citing their goal of getting money to homeowners and automakers, these lawmakers said his decisions could be overturned once President-elect Barack Obama takes office.
"I am concerned that we may have to wait until the next administration before we have the real change in economic policy that our nation needs," Sen. Christopher J. Dodd (D-Conn.) said.