Treasury Secretary Henry M. Paulson Wednesday morning signalled another major change in the $700 billion bailout program, saying he will use the funds to aid consumer finance companies that are not banks to try to revive collapsed markets for auto loans, student loans and credit cards.
In a speech saying his earlier $250 billion bank recapitalization program is working to help revive bank lending and unfreeze capital markets, Mr. Paulson said he must now turn his focus to remedying the freeze in consumer credit securities markets that is hampering consumer access to loans.
"The important markets for securitizing credit outside of the banking system also need support. Approximately 40 percent of U.S. consumer credit is provided through securitization of credit card receivables, auto loans and student loans and similar products," he said. "This market, which is vital for lending and growth, has for all practical purposes ground to a halt."
"The illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards. This is creating a heavy burden on the American people and reducing the number of jobs in our economy," he said.
The Treasury is exploring ways to use the bailout program to coax private investors back into the consumer finance market, possibly through a program of matching private investments with federal funds. He also is working with the Federal Reserve on a program to purchase the most highly rated securities tied to consumer loans to try to improve liquidity in the market for those loans.
"By doing so, we can lower costs and increase credit availability for consumers. Addressing the needs of the securitization sector will help get lending going again, helping consumers and supporting the U.S. economy," he said.
In another possible broadening of the program, Mr. Paulson added that he is also exploring using the bailout program to help spur new lending for commercial as well as residential real estate development.
Mr. Paulson acknowledged that aiding consumer finance firms that are outside the banking system, possibly including GMAC and other auto company finance arms that are in shaky condition, is riskier than helping banks that are regulated by the federal government.
"Broadening access in this way would bring both benefits and challenges," he said. Because many consumer finance companies "are not directly regulated and are active in a wide range of businesses, taxpayer protections in a program of this sort would be more difficult to achieve."
In changing the focus of the program for a second time since the bailout was enacted in last month, Mr. Paulson said he is further postponing Congress' original plan to use the funds to purchase troubled mortgages and other loans from banks and finance companies.
"Our assessment at this time is that this is not the most effective way to use [bailout] funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role," he said.