Paulson: “We Must Take Decisive Action”

Making his case before members of the Senate Banking Committee on Tuesday, Treasury Secretary Henry Paulson said that the U.S. government’s prior “case-by-case basis” approach to managing the current housing and credit crisis is clearly no longer sufficient, and suggested that a plan he and Congressional leaders are now hashing out will be critical to resolving much of the global financial crisis. “These bad loans have created a chain reaction and last week our credit markets froze — even some Main Street non-financial companies had trouble financing their normal business operations,” Paulson said in his remarks. “If that situation were to persist, it would threaten all parts of our economy.” The Treasury chief pointed to poorly-underwritten mortgages as the chief reason the U.S. economy was on the brink of catastrophic failure, saying that the “root cause is the housing correction which has resulted in illiquid mortgage-related assets that are choking off the flow of credit which is so vitally important to our economy.” On Friday, Paulson proposed a sweeping bailout of the U.S. financial system, essentially pushing to remove bad mortgage loans and related assets from the balance sheets of key financial institutions much the same way as a tumor might be removed from a cancer patient. It’s a move that will cost taxpayers dearly — some estimates run as high as $2.4 trillion — but one that Paulson and Bush administration officials say will be less than the alternative. “The ultimate taxpayer protection will be the market stability provided as we remove the troubled assets from our financial system,” he said. “I am convinced that this bold approach will cost American families far less than the alternative – a continuing series of financial institution failures and frozen credit markets unable to fund everyday needs and economic expansion.” Federal Reserve chairman Ben Bernanke had planned to echo a similar sentiment in his testimony, before deciding to venture off-script and speak off-the-cuff on pricing issues surrounding the Treasury bailout plan. “Purchasing impaired assets will create liquidity and promote price discovery in the markets for these assets, while reducing investor uncertainty about the current value and prospects of financial institutions,” his prepared remarks read. “More generally, removing these assets from institutions’ balance sheets will help to restore confidence in our financial markets and enable banks and other institutions to raise capital and to expand credit to support economic growth.” Initially, administration officials had sought unchecked authority to bail out troubled financial institutions; it’s a stance that has softened in the face of harsh criticism from critics, including key Congressional Democrats and Republicans alike. On Tuesday, Paulson directly signaled his support for oversight of the bailout effort, saying that the program should “include provisions that ensure transparency and oversight.” Reports on Monday evening also had suggested that the White House had agreed to oversight of the bailout program, as well as a proposal from Senate Banking Committee chairman Christopher Dodd (D-CT) that would see the government receive stock warrants in return for its purchase of bad assets from an ailing financial institution. See the full HW report. Stock see-sawed throughout much Tuesday as investors weighed the testimony of key officials: the Dow Jones industrials were at 11,024.85 up roughly 9 points, when this story was published. The Dow had fallen below 10,850 earlier in the day.

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