The Bush administration is abandoning the centrepiece of its massive €520bn economic rescue plan and exploring new ways to shore up not only banks but credit card, car loan and other huge businesses.
Democrats are pressing hard to include a multibillion-dollar bail-out for faltering car makers, too – over administration objections.
Unimpressed by any of the talk yesterday, Wall Street plunged ever lower.
“The facts changed and the situation worsened,” US Treasury Secretary Henry Paulson said at a news briefing, explaining the administration’s switch from its original plan to help financial institutions by buying up troubled assets, primarily securities backed by bad home loans.
Despite its new flexibility, the administration remained opposed to using the rescue fund to bail out the ailing car industry or to provide guarantees for home loans, an idea that supporters say offers the greatest hope for helping legions of Americans facing foreclosure.
But Congressional Democrats felt otherwise on cars. House of Representatives speaker Nancy Pelosi and Senate majority leader Harry Reid were pressing for quick passage of a major package for car makers during a post-election session that begins next Tuesday.
One key House Democrat was putting together legislation that would send €19bn in emergency loans to the beleaguered industry in exchange for a government ownership stake in the big three car companies.
But not all the news was bad, Mr Paulson suggested. He said the rescue programme approved by Congress a month ago had already had an impact in dealing with the most severe financial crisis in decades, a credit squeeze threatening to push the country into a deep and prolonged recession.
“Our system is stronger and more stable than just a few weeks ago,” he said. But he warned that much more needed to be done before the economy could turn the corner.
To accomplish those goals, Mr Paulson said the administration would continue to use €185bn of the rescue fund to make direct purchases of bank stock as a way of supplying hundreds and potentially thousands of banks with extra capital in hopes that they will resume more normal lending.
But he said the administration had decided that the original focus of the bail-out programme – the purchase of distressed mortgage-backed securities and other troubled assets on the books of banks – would not be employed.
Mr Paulson said the administration had changed the emphasis because of a need to get money into the financial system much more quickly because of a worsening credit crunch. Setting up a purchase programme for the bad assets was taking too much time, officials said.
It was another rough day on Wall Street as investors received more bad news on corporate earnings and were also disappointed by Mr Paulson’s decision not to mop up bad assets of financial institutions. The Dow Jones industrial average fell for the third straight session, plunging 411.30 points to close at 8,282.66, the lowest close since it hit a five and a half-year low on October 27.
Many politicians applauded Mr Paulson’s switch, saying the administration was finally recognising that its initial plan was flawed.
“I am glad that Secretary Paulson and the rest of the treasury team have finally seen the light,” said Senator Charles Schumer, a Democrat. He said he would still like to see more strings attached to make sure banks used their bail-out money to increase loans.
The administration has already spoken for all but €45bn of the initial €260bn supplied by Congress, including the €187bn for direct stock purchases from banks and €30bn for a new loan supplied on Monday to help stabilise troubled insurance giant American International Group.
Mr Paulson said he believed the €520bn would be sufficient to stabilise the financial system. He would not give an estimate on when Congress would need to authorise the second €262bn.