“There is no playbook for responding to turmoil we have never faced,” wrote U.S. Treasury Department secretary Henry Paulson in an opinion piece featured Monday in The New York Times. The rules for the implementation of funds under the Treasury’s Troubled Asset Relief Program, therefore, have had to adjust along the way, he said. It’s an approach that, thus far, has drawn some strong criticism for Paulson; but the Treasury secretary has also pulled in equal amounts of praise from some peers, as well. Paulson has most recently come under fire for the announced abandonment of TARP funds from their original intent: purchasing troubled mortgage-backed assets from financial institutions’ clogged balance sheets. But in a press conference where the new strategy was unveiled, the former Goldman Sachs chief said he “will not apologize” for altering the Treasury’s strategy as market conditions evolve. In an op-ed that acknowledged some of the rising criticism, Paulson wrote that the Treasury’s initial intent was to strengthen the banking system by purchasing troubled mortgage-related assets and securities, but “the severity and magnitude of the situation had worsened to such an extent that an asset-purchase program would not be effective enough, quickly enough.” Instead, he wrote, the Treasury exercised its authority by deploying a $250 billion capital injection program that — Paulson anticipated — would be followed by a troubled asset-purchasing program. But, by then, it was a too-little-too-late scenario. “In mid-September, before economic conditions worsened, $700 billion in troubled asset purchases would have had a significant impact,” Paulson’s opinion piece read, in part. “But half of that sum, in a worse economy, simply isn’t enough firepower.” Read the op-ed. A changing strategy Paulson echoed the same sentiments in testimony Tuesday morning before the House Committee on Financial Services, and suggested that further allocation of TARP funds wasn’t likely to be seen during the remaining few weeks of his tenure at the Treasury. In his testimony, Paulson addressed several questions that have been asked of him in recent days: Why has the economy worsened under his new Congress-granted authority, why won’t he use his authority for other suffering industries, and why isn’t he addressing housing and mortgages in his execution of TARP, since these lie at the root of the economic turmoil? “The purpose of the financial rescue legislation was to stabilize our financial system and to strengthen it,” he said. “It is not a panacea for all our economic difficulties.” Paulson acknowledged that the financial crisis has already spilled over into our economy and other industries, but said it will take time to get credit flowing and repair the financial system and, in effect, repair the economy. As for housing and forecosure, Paulson said Treasury had already taken key steps to strengthen housing. Read his testimony. “The most important thing we can do to mitigate the housing correction and reduce the number of foreclosures is to increase access to lower cost mortgage lending,” he said. “The actions we have taken to stabilize and strengthen Fannie Mae and Freddie Mac, and through them to increase the flow of mortgage credit, together with our bank capital program, are powerful actions to promote mortgage lending.” His remarks contrasted sharply with assertions from Federal Deposit Insurance Corp. chairman Sheila Bair, who told the committee that enough wasn’t being done to help troubled homeowners. Stability now? Like Paulson, Federal Reserve chief Ben Barnanke stressed that the TARP program was needed and defended the government’s decisions thus far in the area to critical lawmakers. “The value of the TARP in promoting financial stability has already been demonstrated,” he told legislators in the same hearing. “Failure to prevent an international financial collapse would almost certainly have had dire implications for both the U.S. and world economies.” Bernanke also suggested that the nation’s credit crisis had begun to ease. “There are some signs that credit markets, while still quite strained, are improving,” he said, although he cautioned that the economic system was far from out of the woods. “Overall, credit conditions are still far from normal, with risk spreads remaining very elevated and banks reporting that they continued to tighten lending standards through October,” Bernanke said. “There has been little or no bond issuance by lower-rated corporations or securitization of consumer loans in recent weeks.” The Fed has recently told financial institutions to begin lending, although the joint policy statement on the issue is more a suggestion to banks, than a directive. “It is imperative that all banking organizations and their regulators work together to ensure that the needs of creditworthy borrowers are met in a manner consistent with safety and soundness,” he told lawmakers. Of course, banks in the meantime have continued to focus on deleveraging — witness Citigroup Inc. (C), which said it would lay off 20 percent of its employees, and touted its efforts to delever thus far as a positive point. Such a stance suggests more deleveraging has yet to be done. — Paul Jackson contributed to this story. Write to Diana Golobay at [email protected]. Disclosure: The authors held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

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