The Treasury Department’s decision this week to turn the move away from purchasing troubled assets and to instead focus on direct capital injections to bank and non-banks has generated anew the debate over the merits and purpose of the Troubled Asset Relief Program, or TARP. But the decision to turn TARP on its head was led by a concern for healthy banks and the important role they must play in stabilizing the financial system, according to testimony given Friday by Neel Kashkari, interim assistant secretary for financial stability, who appeared before the House Committee on Oversight and Governmental Reform. “With a stronger capital base, our banks will be more confident and better positioned to play their necessary role to support economic activity,” Kashkari argued. “As the markets rapidly deteriorated in October, it was clear to Secretary Paulson and Chairman Bernanke 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,” he said in his testimony. Critics have argued alternatively that Paulson only began purchasing equity after European counterparts began to take similar measures — or after he realized that banks weren’t nearly as free to sell their distressed assets as he’d originally thought. That thinking has crystalized, according Kashkari, into the realization that banks simply need to be supported well enough to earn their way out of the current mess. “In order to continue their critical role as providers of credit, both banks and non-banks may need more capital given their troubled asset holdings, continued high rates of foreclosures, and stagnant global economic conditions,” Kashkari said. “To do this, we are designing further strategies for building capital in financial institutions and are evaluating programs which would further leverage the impact of a TARP investment by attracting private capital, potentially through matching investments.” The matching investments idea is a new wrinkle on the capital purchase program, and would require any banks looking for government funding to attract private capital to match it. The Treasury is also examining strategies to support consumer access to credit through the asset-backed securitization market, which has played a critical role in lowering the cost and increasing the availability of consumer finance, according to Kashkari. “The market is currently in distress and its illiquidity is raising the cost and reducing the availability of car loans, student loans and credit cards,” he said. The idea here is that the Treasury will begin funding securitization via a government repo facility, but details are yet scarce on the thinking in this area. Read his testimony. Write to Diana Golobay at [email protected].

More: