U.S. backs away from plan to buy bad assets
Wed Nov 12, 2008 10:36pm EST    


WASHINGTON (Reuters) - The Bush administration on Wednesday largely 
abandoned its plan to buy up toxic mortgage assets and said it will 
focus its $700 billion financial bailout fund on making direct 
investments in financial institutions and shoring up consumer credit 
markets.

The U.S. Treasury Department initially promoted the financial rescue 
package approved by Congress last month as a vehicle to buy illiquid 
mortgage assets from banks and other institutions to spur fresh 
lending.

However, that plan never got off the ground and U.S. Treasury 
Secretary Henry Paulson told a news conference asset purchases were 
not the most effective use of the funds.

"This is not going to be the focus," he said. Paulson added, 
however, that the Treasury would continue to examine the usefulness 
of "targeted" purchases.

Treasury has already tapped the fund to inject capital into banks 
and ailing insurer American International Group. Paulson said he was 
considering a second round of preferred share purchases in both 
banks and non-bank institutions which, in a fresh twist, would match 
privately raised funds.

He also said the Treasury was working with the Federal Reserve on a 
plan to help restore credit flows to U.S. households by using 
financial rescue funds to lure investors back to markets for 
securitized debt, such as car loans, student loans and credit cards.

The administration's shifting focus disappointed Wall Street and 
U.S. stock prices tumbled sharply. The Dow Jones industrial average 
closed down 408 points, or 4.7 percent.

"This hasn't done the Treasury's credibility a world of good," said 
Alan Ruskin, chief international strategist at RBS Global Banking 
and Markets in New York. "Basically, they found that the market 
would applaud direct capital injections more readily than 
understanding the complexities of reverse auctions to buy assets, so 
it's a pragmatic choice."

Paulson was unapologetic, saying that by the time the rescue bill 
was passed on October 3, it was clear the asset purchase plan would 
take too long and would not be sufficient to calm roiling markets.

"I will never apologize for changing a strategy or an approach if 
the facts change," he said.

COOL TO CALLS FOR HELP

The $700 billion financial sector bailout is the United States' 
marquee effort to combat a credit crisis spawned by rising U.S. 
mortgage defaults that is now wreaking economic damage worldwide.

To help ease the crisis, the U.S. Treasury and bank regulators on 
Wednesday issued "guidance" for banks encouraging them to lend and 
to rein in any compensation plans that might lead executives to take 
excessive risks.

Earlier on Wednesday, Canada announced a plan to buy up another $41 
billion in insured mortgages and other steps to try to free-up 
credit.

Paulson said the U.S. Treasury was duty-bound to help prevent 
mortgage foreclosures, but he warned that further aid would likely 
mean a significant government subsidy, signaling a lack of support 
for a Federal Deposit Insurance Corp. proposal for more aggressive 
aid to borrowers.  Continued...



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