US reverses plan to buy toxic assets

THE US government has abandoned its plan to buy troubled assets from financial institutions, using the $700 billion (€560 million) allocated for the scheme to take equity stakes in banks instead.

In a dramatic policy reversal, US Treasury secretary Henry Paulson said yesterday that the administration now believed that using billions of dollars to buy troubled assets of financial institutions was “not the most effective way” to ease the credit crunch.

“At the time, we believed that would be the most effective means of getting credit flowing again,” Mr Paulson said.

“During the two weeks that Congress considered the legislation, market conditions worsened considerably. It was clear to me by the time the Bill was signed on October 3rd that we needed to act quickly and forcefully, and that purchasing troubled assets – our initial focus – would take time to implement and would not be sufficient given the severity of the problem. In consultation with the Federal Reserve, I determined that the most timely, effective step to improve credit market conditions was to strengthen bank balance sheets quickly through direct purchases of equity in banks.”

Congress agreed to release the funds in instalments and Mr Paulson said much of the $250 billion already released had been used to shore up the balance sheets of financial institutions. He plans to use the second stage of the rescue package to help relieve pressures on consumer credit.

“Illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards,” he said.

“This is creating a heavy burden on the American people and reducing the number of jobs in our economy.”

Democrats in Congress, with the support of president-elect Barack Obama, have been pressing the administration to use part of the rescue package to help ailing car manufacturers such as General Motors, which warned last week that it could run out of cash by the end of the year.

Mr Paulson said, however, that a rescue package aimed at strengthening the financial system was not the proper instrument to help manufacturers.

“We need a solution, but the solution has got to be one that leads to viability,” he said.

The White House said it would work with Congress to help car manufacturers but continued to reject the possible use of treasury department rescue funds. “We don’t think that that was Congress’s intent,” said White House press secretary Dana Perino.

“People can blame the president of the United States for a lot of things and a lot of things land on his desk, but the state of the automakers right now is not the president of the United States’s fault.”

Looking ahead to this weekend’s global economic summit in Washington, Mr Paulson said co-ordinated international action was essential but warned against an exclusive focus on improving regulation and ignoring global imbalances.

“There is no doubt that low US savings are a significant factor, but the lack of consumption and accumulation of reserves in Asia and oil-exporting countries and structural issues in Europe have also fed the imbalances,” he added.

“If we only address particular regulatory issues – as critical as they are – without addressing the global imbalances that fuelled recent excesses, we will have missed an opportunity to dramatically improve the foundation for global markets and economic vitality going forward. The pressure from global imbalances will simply build up again until it finds another outlet.”