The administration decided that using billions of dollars to buy troubled assets of financial institutions at the current time was "not the most effective way" to use the $700 billion bailout package, Paulson told a news conference, according to the Associated Press.
Paulson said his staff has continued to examine the benefits of purchasing soured mortgage assets under the so-called Troubled Asset Relief Program, or TARP.
"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, relative to other potential uses of TARP resources," Paulson told reporters, according to Reuters.
Paulson said the administration will continue to use $250 billion of the program to purchase stock in banks as a way to keep them afloat and boost the flow of normal lending.
"Although this program's primary purpose is stabilizing our financial system, banks must also continue lending," Paulson said.
Paulson announced a new aim for the program to support financial markets that supply consumer credit in such areas as credit card debt, auto loans and student loans -- sectors which have struggled amid the recent financial turmoil.
"Approximately 40 percent of U.S. consumer credit is provided through securitization of credit card receivables, auto loans and student loans and similar products," Paulson said, according to prepared remarks. "This market, which is vital for lending and growth, has for all practical purposes ground to a halt."
The announcement marked a major change in the goals for the hotly debated government bailout program, which allowed the Treasury Department to buy up soured assets as part of a wider effort to shore up the U.S. financial system after several titans of Wall Street crumbled under bad mortgage-related debt.
Speaking ahead of this weekend's Group of 20 economic summit in Washington, Paulson said the Treasury is evaluating a second program that would provide matching government investments to banks that were able to raise money on their own.
"In developing a potential matching program, we will also consider capital needs of non-bank financial institutions not eligible for the current capital program," Paulson said.
Paulson also said a proposal to have part of the bailout funds used to help guarantee troubled mortgages is an approach the administration continues to discuss, but he did not announce that it would be adopted, the AP reported.
In addition to the $250 billion the Bush administration has already committed of the $700 billion rescue fund for the purchase of bank stock, the administration said Monday that it was allocating another $40 billion toward shoring up troubled insurer American International Group.
That leaves some $60 billion of the initial $350 billion that Congress authorized for use to be doled out. To access the other $350 billion, either this administration or the next will have to make a request to Congress, the AP reported.