Tue Nov 18th, 2008 at 03:13:18 AM EST
Henry Paulson announced yesterday, in an interview with the Wall Street Journal, that he was not planning to go any further with the $700bn bailout that the US Congress was persuaded to grant only a few weeks ago.
The original intention was to build a team to evaluate toxic assets on banks' balance sheets and buy them out, but none of this has been done - Paulson already announced last week that the stables-cleaning plan was abandoned. Now he appears to be putting the entire bailout on hold until the new administration comes in.
"I want to preserve the firepower, the flexibility we have now and those that come after us will have."
TARP spending so far (WSJ) ===>
This bailout freeze might reflect, in terms of power politics, a stand-off between Obama and Bush over the use of financial firepower. Paulson clearly says he won't be using bailout money to help mitigate the effect of mortgage foreclosures, as House Democrats asked him and Fed chief Ben Bernanke yesterday (Pelosi: they must take immediate action and do everything they can to help hard-working Americans stay in their homes).
But there's also a statement of failure here (my bold):
Paulson Will Keep Reserve To Stay Flexible for Future - WSJ.com
On Tuesday, Mr. Paulson could face a hostile reception from lawmakers when he testifies about the bailout, including Treasury's decision to forgo its initial plan to buy bad loans from banks and other entities, and instead inject capital directly into banks. Mr. Paulson plans to tell Congress that Treasury couldn't pursue its first option because after investing $250 billion in banks, it didn't have enough left to make a meaningful impact.
"We recognized that a troubled-asset purchase program, to be effective, would require a massive commitment of TARP funds," Mr. Paulson plans to say, according to a draft of his prepared testimony, referring to the Troubled Asset Relief Program.
Mr. Paulson defended that decision, saying Treasury's equity-purchase program has helped stabilize the financial sector and limited the potential for the future collapse of any big financial institution. "We've turned the corner in terms of stabilizing the system. There's no longer this worry out there that some systemic institution is going to fail."
Still, Mr. Paulson acknowledges that dropping the asset-purchase plan will leave a key problem unresolved: "These institutions are still clogged with these assets. They're going to need to write them down, sell them over time, take losses," he said. Mr. Paulson added that he is working with the Fed to develop a lending facility that would encourage investors to buy some of these assets.
In other words, a long and troubled unwinding road ahead. What use has been the TARP?