The Bush administration today publicly backed away from using a $700 billion bailout fund to buy toxic mortgage assets as originally intended, and said it will focus instead on shoring up financial institutions with direct investments.
US treasury secretary Henry Paulson told a news conference he was considering using remaining bailout funds on a second round of purchases of preferred shares in both banks and non-bank institutions that would match privately raised funds.
He also said the Treasury was working with the Federal Reserve on a plan to shore up markets for securitized consumer debt such as car loans, student loans and credit cards, which could help restore credit flows to US households.
The Treasury initially promoted the $700 billion Troubled Asset Relief Program to Congress as a vehicle that would buy illiquid mortgage assets from banks and other institutions to cushion potential losses, allowing them to resume lending.
"This is not going to be the focus," Mr Paulson said. He added, however, that the Treasury would continue to examine the usefulness of "targeted" purchases.
The administration's shifting focus disappointed Wall Street and stocks tumbled sharply, reflecting concerns about the scope of the US economy's troubles and shareholder dilution in the financial sector. In early afternoon, the Dow Jones industrial average was down 304 points, or 3.5 per cent.
The $700 billion financial sector bailout, approved by Congress in early October, is the United States' marquis effort to combat a credit crisis spawned by rising mortgage defaults that is now raging worldwide.
Earlier today, Canada announced a plan to buy up another $41 billion in insured mortgages and other steps to try to free-up credit.
Mr Paulson said the US Treasury was duty-bound to help prevent mortgage foreclosures, but he warned that further aid would likely mean a significant government subsidy - signaling a lack of support for a Federal Deposit Insurance Corp proposal for more aggressive aid to borrowers.
Reuters