By Neil Irwin
Washington Post Staff Writer
Wednesday, November 19, 2008
Lawmakers accused Treasury Secretary Henry M. Paulson Jr. yesterday of haphazardly managing the $700 billion financial rescue, as fault lines widened over what the government should try next to contain the fallout of the financial crisis.
The heated hearing before the House Financial Services Committee offered a preview of the pressures the Obama administration will face from Congress. Democrats, who are urgently pressing for aid to homeowners at risk of foreclosure as well as to the auto industry, said Paulson gave Congress a misleading sales job about how he would use the bailout.
"You seem to be flying a $700 billion plane by the seat of your pants," said Rep. Gary L. Ackerman (D-N.Y.), in the hearing.
Paulson, in his first congressional testimony since the rescue package was passed in early October, launched a spirited defense.
With Federal Reserve Chairman Ben S. Bernanke and Federal Deposit Insurance Corp. Chairman Sheila C. Bair at his side -- who both received far less aggressive questioning -- Paulson argued that what congressional critics considered an inconsistent response was instead a reaction to a fast-moving situation.
"There is no playbook for responding to turmoil we have never faced," Paulson said. "We adjusted our strategy to reflect the facts of a severe market crisis."
Lawmakers are none too pleased with the way Paulson and his colleagues so far are handling the powers they were granted under the rescue plan. "There's a lack of confidence, it seems to me, both in this body and in the general population," said Rep. Paul E. Kanjorski (D-Pa.). "Do we have a plan? Where are we going?"
Paulson repeatedly tried to draw a distinction between actions that are meant to arrest the deep financial crisis that has clogged all manner of lending worldwide -- for which the rescue package was designed -- and those meant to bolster parts of the economy.
"The purpose of the financial rescue legislation was to stabilize our financial system and to strengthen it. It is not a panacea for all our economic difficulties," Paulson said in prepared testimony. "The crisis in our financial system had already spilled over into our economy and hurt it."
Even members of Congress who have had good working relationships with Paulson were frustrated that he has resisted their calls to use money in the Troubled Asset Relief Program, or TARP, to provide foreclosure relief.
"When the program was passed, very explicit language was included to provide for mortgage foreclosure," said committee Chairman Barney Frank (D-Mass.). "It is essential that we do something to use some of the TARP funds for the diminution of the rate of mortgage foreclosures."
Some lawmakers are going further: Rep. Maxine Waters (D-Calif.) said she is personally helping 26 people renegotiate their mortgages, and described spending an hour on hold waiting for help and escalating her complaints to the chairman of Wells Fargo to get resolution.
Paulson said that he is "dedicated to implementing" proposals to ease foreclosures that would "protect the taxpayer and work well." But he said that TARP was not the best vehicle for that, as it is best used for bolstering the overall financial system rather than individual homeowners.
Bair, on the other hand, recommended that $24 billion of the bailout funds be used to help people avoid foreclosure. She warned that the government is "clearly falling behind the curve" as foreclosures mount and said it is "essential" for the Treasury to offer loan guarantees and credit to keep people in their homes.
Bair told the panel that federal programs to help struggling homeowners are inadequate and estimated that as many as 5 million homes would be foreclosed on over the next two years if help was not extended.
Paulson said he has not ruled out using bailout money to mitigate foreclosures, although he has reservations about the idea. Bernanke, however, called Bair's proposal a "very promising approach."
Paulson deflected calls to use the financial package to bolster troubled automakers.
"The TARP was aimed at the financial system," Paulson said. "I think it would be not a good thing. It would be something to be avoided, having one of the auto companies fail." But, he said, "I don't see this as the purpose of the TARP."
Noting that Paulson told Congress that he would use the money to buy troubled mortgage assets, but then reversed course and has used it to pump capital into banks, Ackerman called it "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."
Paulson did definitively exclude one group from any government money. A group of plumbers had proposed applying for TARP money, said Rep. Jeb Hensarling (R-Tex.), because they plan to refurbish foreclosed properties.
"We got very broad authorities and powers," Paulson said. "But we certainly are not going to give money to plumbing contractors."
"The 15 minutes of fame for the plumbing industry appears to have ended," Frank said.