Treasury Secretary Henry Paulson's New Plan for the Bailout
Wednesday, November 12, 2008SUSIE GHARIB: The Intel warning capped off another dismal day for stocks which plummeted after the government announced big changes to its financial rescue plan. The Dow tumbled 411 points and the NASDAQ fell 81 as investors worried that the rescue plan's shakeup is a sign the U.S. economy is heading to a deep recession. Treasury Secretary Henry Paulson today announced an expansion of the government's bailout beyond banks to include consumer loan companies and insurers. Paulson also said the government no longer plans to buy toxic assets held by financial institutions. We have two reports tonight, looking at the government's new direction and what companies could be next in line for a bailout. We begin with Washington bureau chief Darren Gersh.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Treasury Secretary Henry Paulson says when the facts change, he'll change. And that's why the Treasury is changing course on the so-called troubled assets relief program or TARP for short. Paulson said the $700 billion financial rescue package that was originally designed to buy up troubled mortgage securities, won't.
HENRY PAULSON, TREASURY SECRETARY: Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role.
GERSH: Paulson concluded buying troubled assets would take too long and would not do enough to repair bank balance sheets. Critics like Dean Baker say Paulson has finally seen the light.
DEAN BAKER, CO-DIR.,CENTER FOR ECONOMIC & POLICY RESEARCH: He consistently underestimated the severity of the problem and then when it came to a solution, to my mind he went entirely down the wrong track and he now agrees with what I and most economists in the country were saying.
GERSH: Going forward, Paulson intends to find other uses for the TARP. The Treasury is considering using government money as matching investments to convince private investors to inject their cash into key players in the financial system. Also on the table: working with the Federal Reserve to finance the market for securitized or bundled consumer assets like student loans, car loans and credit card bills. Forty percent of consumer credit is provided through this market and Paulson says it's been all but shut down by the credit crunch.
PAULSON: 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.
GERSH: Treasury also wants to help what Paulson called non-bank financial institutions. That might include life insurance companies, credit unions, even brokers. Financial services industry lobbyist Scott Talbot calls it a good idea.
SCOTT TALBOTT, SR. VP GOV'T AFFAIRS, FINANCIAL SERVICES ROUNDTABLE: I think what they are trying to do is signal that they are willing to talk about injecting TARP money into an institution that has a direct lending relationship with the consumer. The consumer is the one that drives the economy, so we want to put the government dollars into the hands of the institutions that lend to the consumers.
GERSH: Paulson also suggested any remaining funds from the financial rescue package be held as a contingency fund to deal with new financial shocks. Some speculated that might open the window to help for GM and Ford, since their failure cold throw millions out of work. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: This is Scott Gurvey in New York. Today Treasury Secretary Hank Paulson called an audible. That's what the quarterback does when he figures the play he originally set up isn't going to work. Wall Street's reaction was both swift and negative. Economist Bob Brusca says it is difficult for the markets to have confidence when the game plan keeps changing.
ROBERT BRUSCA, CHIEF ECONOMIST, FACT & OPINION ECONOMICS: They want you to just take it on faith that they are going to hold things together, however bad it looks. Like the wizard of Oz, you know, ignore that man behind the curtain because everything is going to be fine.
GURVEY: The Treasury secretary says new government capital injections will be made only to financial sector companies. Joe Andrew, a former chairman of the Democratic National Committee who advises companies on government regulation, says that is not popular on Main Street.
JOSEPH ANDREW, PARTNER, SONNENSCHEIN NATH & ROSENTHAL: People walk up to me and say, where were these guys when Katrina happened? If you can bail out Wall Street so quickly, where were you when the city of New Orleans and millions of people needed help. It's a legitimate criticism.
GURVEY: What is being asked on Main Street is where does the bailout end? From mortgage lenders to investment banks, from commercial banks to hedge funds, will taxpayers now bail out American Express? How about the auto companies? And how much reform will the government demand from companies in which it invests?
BRUSCA: A lot of us wonder, if you prop things up and if you get back, quote to normal, how do you get back to doing those things again? How do you take these government - the monies from the government that have gone to the private sector and pull them back. Is this healing penicillin or is this crack cocaine?
GURVEY: Whatever the ultimate outcome, it is clear that this crisis has set a precedent which will have a long-lasting impact on the relationship between the private and public sectors.
ANDREW: You've just seen the most dramatic expansion of government activity in the private sector in the history of the United States under a Republican administration. The real question here is, will it work or not work?
GURVEY: On January 20, a new administration takes over in Washington and may change the game plan again. Of course, at any time between now and then, the current government can call another audible. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
