Paulson Stays the Course on Financial Rescue Planby
In remarks to executives gathered for the Fortune 500 Forum in Washington, D.C., Treasury Secretary Henry Paulson broke no news, but he did give more hints about what is — and isn’t — likely in the waning weeks of his tenure.
For one thing, he didn't budge on mortgage-modification. For weeks, Democrats in Congress have pushed the Treasury to implement a plan directly assisting homeowners in the face of foreclosure -- perhaps one along the lines recently proposed by Federal Deposit Insurance Corp. Chairwoman Sheila Bair.
Paulson has steadfastly resisted, on the one hand telling the lawmakers that their bill wasn't intended to aid homeowners in the way they want him to; on the other saying it wouldn't be a wise use of federal funds.
This afternoon, again, he called the housing crunch the "root" of the financial crisis, but blandly declared that the agency's staffers "continue to examine appropriate foreclosure mitigation" programs. (See his prepared remarks.)
When an audience member asked why he opposed Bair's plan, he responded, "I don't think that I'm opposed to any plan." As before, he said it's "difficult" to design a plan that doesn't help speculators or homeowners who don't need it, or those who would get help under the various voluntary programs in place.
He alluded to developing new programs to tackle various aspects of the financial crisis, including unspecified ways to improve consumer lending (beyond last week's announcement) to help the Fed buy mortgage-backed securities and lend to investors holding highly rated consumer debt.
But he also hinted that, perhaps, nothing new is planned before President-Elect Barack Obama takes office Jan. 20 -- and that he may still want to leave some of the remaining bailout funds for his successor, Timothy Geithner, who is already intimately involved in the bailout so far. Specifically, Paulson said the Treasury "will discuss [any new programs] with the Congress and the next administration" when the new plans are ready, and that the agency "also maintain flexibility and firepower for this administration and the next."
He did use somewhat stronger language to exhort banks to lend with the capital the Treasury has invested in them. "We expect banks to increase their lending as part of these efforts, and it is important that they do so," he said, reiterating that federal banking regulators had said much the same in recent weeks. Congressional Democrats have criticized him for not actually requiring banks to lend out the capital they received.
Paulson has said that banks would be under shareholder pressure to lend the funds to prevent a slide in the institutions' return on capital; banking analysts have questioned the reasoning, saying shareholders are currently more concerned about a bank's solvency than their returns.
In response to another question, Paulson said it wasn't a big surprise that the National Bureau of Economic Research had declared the economy in recession since December 2007. He said he and others figured the economy had slowed seriously, and "I think the American people have known that for some time."
He grew a little introspective toward the end, asked what lessons he and others could draw from origins of the crisis, and where he would draw the line on interfering in the free markets. He cautioned against drawing conclusions about the causes too soon, before the worst was over and a thorough analysis was possible, and he said some of what he has done would have seemed unthinkable a year earlier.
Looking ahead, he reiterated his earlier calls for a "systemic" regulator that can look across industries to spot threats to the financial system as a whole, some kind of federal hedge-fund charter that would let regulators keep an eye on the massive investment pools, and market structures for trading and monitoring credit default swaps and financial derivatives.
And, even as the federal bailout is fostering massive consolidation in the banking industry, he warned against allowing massive financial firms to imperil the economy. "We need to get to a place in this country where no institution is too big or too important to fail," he said.
But he said he wouldn't rule out any particular federal intervention. Until the crisis is past, "you're not going to get me to say never," he said. A year ago, "I would have drawn the line in a different place" than he might today.
He concluded: "It's our fault that we let the system get so out of balance that it took a crisis like this to get us to figure out how to get it back in balance again."