US backtracks on plan to buy toxic assets

US backtracks on plan to buy toxic assets

WASHINGTON

Thursday, November 13, 2008

US TREASURY Secretary Henry Paulson yesterday said he was backing away from buying troubled mortgage assets using a US$700 billion bailout fund, instead favouring a second round of capital injections into financial institutions that would match private funds.

Paulson, in an update on the Treasury's financial rescue efforts, said his staff has continued to examine the benefits of purchasing illiquid mortgage assets under the so-called Troubled Asset Relief Programme (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 a news conference.

When Treasury was selling the US$700 billion bailout plan to Congress, it initially promoted it as a vehicle that would purchase illiquid mortgage assets from banks and other institutions to cushion potential losses.

But it became quickly apparent that setting up such purchases would take time, and Treasury opted for the faster method of injecting capital directly into banks by buying preferred stock.

The Treasury has allocated US$250 billion of the fund to such purchases so far.

Paulson said the Treasury is evaluating a second programme that would provide government investments that would match private investments in capital raisings.

"In developing a potential matching programme, we will also consider capital needs of non-bank financial institutions not eligible for the current capital programme," Paulson said.

He also said support was needed for the markets that securitise credit outside the banking system for products such as car loans, credit cards and student loans. The Treasury and Federal Reserve are exploring the development of a potential liquidity facility for highly rated AAA asset-backed securities.

"We are looking at ways 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 the taxpayers' investment," Paulson said.

US stocks extended losses in early trade yesterday after the announcement. The Dow Jones industrial average was down 3.39 per cent at 8,399.02. The Standard & Poor's 500 Index was down 3.38 per cent at 868.56. The Nasdaq Composite Index was down 2.82 per cent at 1,536.35.Reuters