By Jason Simpkins
U.S. Treasury Secretary Henry M. Paulson yesterday (Wednesday) announced a reshaping of the government's $700 billion Troubled Asset Relief Program. Instead of purchasing troubled assets directly from banks, Paulson said the majority of the funds allotted to the Treasury Department would be used to purchase equity stakes in financial institutions and bolster the consumer credit market.
"We asked for $700 billion to purchase troubled assets from financial institutions. At the time, we believed that would be the most effective means of getting credit flowing again," Paulson said in a statement.
However, "it was clear to me by the time the bill was signed on October 3rd that… purchasing troubled assets – our initial focus – would take time to implement and would not be sufficient given the severity of the problem," Paulson added. "In consultation with the Federal Reserve, I determined that the most timely, effective step to improve credit market conditions was to strengthen bank balance sheets quickly through direct purchases of equity in banks."
Paulson said he was considering using remaining bailout funds on a second round of purchases of preferred shares in financial institutions. The Treasury has already committed $250 billion of the $700 billion rescue fund to the purchase of bank stock, and on Monday, used another $40 billion to prop up insurance giant American International Group. Inc. (AIG). That leaves just $60 billion of the initial $350 billion allocation available for use.
Paulson will have to appear before Congress to secure the second half of the $700 billion bailout plan.
Paulson also said he is working with the U.S. Federal Reserve to create a facility to bolster the market for asset-backed securities by funding consumer finance companies.
"With the Federal Reserve we are exploring the development of a potential liquidity facility for highly-rated AAA asset-backed securities," Paulson said. "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."
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Federal Government Grants AIG a New Bailout Package