The Treasury Department announced Wednesday that it no longer plans to buy troubled mortgage-related assets from banks with the $700-billion financial relief package created last month. The move explicitly abandons the original intention of the rescue bill, as Treasury Secretary Henry Paulson has changed the focus of the relief program to other areas.
In a press conference, Paulson revealed that the the government will now focus on building capital in financial institutions, on finding ways to support consumer access to credit and on looking at ways to ease mortgage foreclosures.
Achieving these goals could include encouraging private investment in banks through providing matching funds, as well as a lending facility to support the asset-backed securities market.
Paulson said while he had originally proposed the $700-billion financial relief bill to buy troubled mortgage-related assets, events over the past few weeks have shown that this is now longer the best strategy.
The Treasury Secretary noted that the financial relief bill took a couple weeks to work its way through Congress - a tense, sometimes rancorous process that failed its first vote in the House before passing shortly afterward in a slightly altered form. Paulson said that the financial situation had deteriorated from the time the bill was proposed and when it was finally passed, forcing him to take more pointed action to stem the crisis.
The government set aside $250 billion from the financial relief money to buy direct equity stakes in banks. In Wednesday's press conference, Paulson revealed that by October 26th, the government "had $115 billion out the door" to eight large financial institutions. The Treasury secretary also noted that dozens of additional applications have been approved for government investment.
Paulson said the government is looking at further strategies for building capital in financial institutions, including encouraging private capital through the use of matching funds. The program might also be expanded to include lightly-regulated non-bank financial institutions, the Treasury secretary said, though he noted that this would bring up challenges in protecting taxpayer money.
The government is also looking at ways to support consumer access to credit outside the banking system, Paulson said, including ways of stabilizing the asset-backed securities market.
"With the Federal Reserve we are exploring the development of a potential liquidity facility for highly-rated AAA asset-backed securities. We are looking at ways to possibly use the TARP to encourage private investors to come back to this troubled market, by providing them access to federal financing while protecting the taxpayers' investment," Paulson stated.
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