Bailout fund may not be diverted to car-makers

UNITED STATES treasury secretary Hank Paulson has told Congress that the financial crisis is too unpredictable to allow part of a $700 billion (€555.5 billion) bailout fund to be used to help ailing car manufacturers.

Democrats are pressing for $25 billion emergency funds for the three biggest US car-makers - General Motors, Ford and Chrysler - which have warned that they are fast running out of cash.

Testifying before the House Financial Services Committee yesterday, however, Mr Paulson said the $700 billion approved by Congress last month was designed solely to stabilise the financial system.

"The rescue package was not intended to be an economic stimulus or an economic recovery package; it was intended to shore up the foundation of our economy by stabilising the financial system, and it is unrealistic to expect it to reverse the damage that had already been inflicted by the severity of the crisis," he said.

General Motors has warned that it could face bankruptcy by the end of the year unless it receives a bridging loan, but Mr Paulson told lawmakers that they could find $25 billion for the car industry elsewhere and suggested that there were other ways to help Detroit.

"I think it would not be a good thing, it would be something to be avoided, having one of the auto companies fail, particularly during this period of time," he said.

Mr Paulson defended his decision to abandon a plan to buy up toxic assets from financial institutions and to take equity stakes in banks and other institutions instead. He said the equity-purchase programme has helped to stabilise the financial sector and limited the potential for the future collapse of financial institutions.

"We've turned the corner in terms of stabilising the system. There's no longer this worry out there that some systemic institution is going to fail."

Mr Paulson said he is working with the Federal Reserve to develop a lending facility that would encourage investors to buy some of the distressed assets.

"These institutions are still clogged with these assets. They're going to need to write them down, sell them over time, take losses."

Mr Paulson faced tough questioning, with committee chairman Barney Frank complaining about the "ad-hoc nature" of the administration's approach to the crisis.

Federal Reserve chairman Ben Bernanke defended the administration's U-turn on how to use the bailout fund, arguing that it was essential that the treasury should be able to use the money for capital injections and other measures to prevent the failure of a major financial institution.