Wall Street: Paulson says administration finished with bailouts

Treasury to stop rescue spending, conserve funds until Obama takes over

Maura Reynolds | Los Angeles Times

11/18/2008 -

WASHINGTON — Treasury Secretary Henry Paulson told unhappy congressional Democrats on Tuesday that, barring a catastrophe, the Bush administration intended to stand pat on its existing effort to stabilize financial markets — and leave the next stage of economic recovery to the new administration.

Having committed about half of the existing $700 billion rescue fund to ease Wall Street's credit crunch, Paulson said he had no plans to spend the rest, even on the root cause of the crisis — soaring mortgage foreclosures.

"The prudent course, at this time, is to conserve the remaining funds available from the (rescue program), providing flexibility for this and the next administration," Paulson told lawmakers during a contentious hearing before the House Financial Services Committee.

During Paulson's testimony, committee members, at times raising their voices, complained that the administration was willing to spend money on big banks and insurers but not on ordinary Americans.

"I hope that you understand the pain and the suffering of so many homeowners in this country that are losing their homes," said Rep. Nydia Velazquez, D-N.Y. "It's just not enough to say to the banks, 'Here is the money and, by the way, I trust you.' Because they are not lending!"

Rep. Barney Frank, D-Mass., although acknowledging that Paulson had shown results in the financial crisis, berated him for not using his existing legal authority to stem the tide of foreclosures.

Frank, the panel chairman, and Velazquez expressed support for a plan by FDIC Chairman Sheila Bair to speed refinancings of troubled mortgages.

"We need to prevent unnecessary foreclosures, and we need to modify loans at a much faster pace," Bair, a Republican, told the committee. "We all know there is no single solution or magic bullet, but as foreclosures escalate, we're clearly falling behind the curve."

Paulson backed Bair's central idea to lower mortgage payments to about a third of a borrower's income as long as that income is verified and other criteria are met. But he voiced concern about a provision under which the government would absorb half of any losses from a future default.

He argued that recapitalizing banks would do more to help the economy than would direct aid to homeowners.

Bair, an independent regulator who has criticized the administration response as inadequate, said the foreclosure situation was too dire for such a cautious approach.

Paulson gave his most detailed explanation of the rescue program so far, explaining that the government switched gears in midstream — abandoning a plan to buy troubled securities and adopting one to inject capital into the banking system — because the economy deteriorated so quickly as the legislation was being written.

Many economists are predicting the most severe recession in decades. With energy prices tumbling in recent months, the specter of inflation — which haunted policymakers into the summer — has faded.

The Labor Department reported Tuesday that the producer price index, heavily influenced by prices of commodities such as fuel, sank a record 2.8 percent in October.