FT.com / World - US drops plan to buy toxic assets: The US government on Wednesday abandoned its plan to buy toxic assets, saying the money would be better spent on an expanded recapitalisation programme and supporting markets that securitise consumer credit.
The move is a dramatic reversal by Hank Paulson, Treasury secretary, who made the asset purchase plan the centrepiece of his high-stakes pitch for $700bn in rescue funds from Congress under the troubled asset relief programme (Tarp).
“Our assessment at this time is that this is not the most effective way to use Tarp funds,” Mr Paulson said.
Pressed to explain why he had changed his mind so soon after asking Congress to back asset purchases, he said: “The situation worsened, the facts changed.”
Some investors expressed dismay at the decision. “For the Treasury to come out and now say they are not going to do what they originally planned, is a real credibility problem,” said Jim Sarni, portfolio manager at Payden & Rygel.
Mr Paulson said the “critical priorities” for the remaining $410bn in uncommitted funds were to further recapitalise and strengthen the financial system, support markets that securitise credit card loans, auto loans and student loans and reduce foreclosures.
The Treasury secretary raised the possibility that in the second round of capital injections, the government could invest in non-bank financial firms as well as banks.
He said the Treasury was evaluating a programme in which the government would provide funds to match those financial institutions were able to raise from private investors.
But Mr Paulson also signalled that Treasury would not rush the second round of recapitalisation, which may not take place until the next administration takes office. “Before embarking on a second capital purchase programme, the first one must be completed, and we have to assess its impact,” he said.
Mr Paulson said the Treasury was also working with the Federal Reserve to develop a financing programme for the asset-backed commercial paper market in which US consumer loans are typically financed.
Mr Paulson said it was clear by the time Congress passed the Tarp legislation that the plan to buy assets would “take time to implement and would not be sufficient given the severity of the problem”. Capital injections offered a “more powerful” way to shore up the financial system and support lending.
“I will never apologise for changing an approach or strategy when the facts change,” Mr Paulson said.
His comments came as the Fed joined other US banking regulators in publicly pressing banks to honour their side of the bargain and sustain lending.
Meanwhile, the Barack Obama transition team said the president-elect would send Madelaine Albright, a former Democratic secretary of state, and Jim Leach, a former Republican Congressman, to represent him at the G20 summit of world leaders that is set to discuss the economic crisis this weekend.
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