Washington — Treasury Secretary Henry Paulson said Wednesday that the government will not use any of the $700 billion granted by Congress to purchase troubled assets.
Though that was the original purpose of rescue funding, Paulson said capital injections are working, and should be extended beyond banks to other industries.
"Over these past weeks we have continued to examine the relative benefits of purchasing illiquid mortgage-related assets," Paulson said at a press conference. "Our assessment at this time is that this is not the most effective way to use Tarp funds."
Paulson said Treasury is focused on "further strategies for building capital in financial institutions."
Future investments may be conditioned on an institution's ability to raise private capital, he said, and injections could go beyond the banking industry.
"We are carefully evaluating programs which would further leverage the impact of a Tarp investment by attracting private capital, potentially through matching investments," he said. "In developing a potential matching program, we will also consider capital needs of non-bank financial institutions not eligible for the current capital program; broadening access in this way would bring both benefits and challenges."
While such companies could provide credit to businesses and consumers, Paulson warned that many are not directly regulated and taxpayer protections could be more difficult.
"Also, before embarking on a second capital purchase program, the first one must be completed, and we have to assess its impact and use this information to evaluate the size and focus of an additional program in light of existing economic and market conditions," he said.
Paulson declined to name what other industries may qualify for Tarp funds but many speculate Treasury will invest in the insurance and auto industries.
On Oct. 3, Congress passed a bill that gave $700 billion to Treasury to set up an asset purchase program. But Treasury used $250 billion of the money from the Troubled Asset Relief Program, or Tarp, for capital injections in banks. It also has used $40 billion to aid American International Group Inc. (AIG). That technically was a purchase of a troubled asset, but the asset was a stake in AIG itself.
Paulson said Treasury also is focused on ways to support consumer access to credit outside the banking system. He said Treasury and the Federal Reserve Board are exploring the development of a potential liquidity facility for highly rated AAA asset-backed securities.
"We are looking at way 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 taxpayers' investment," he said. "By doing so, we can lower costs and increase credit availability for consumers."
Source: American Banker
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