Lawmakers rip Fed's 'bait-and-switch'

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By David R. Sands

Angry lawmakers Friday accused the Treasury Department of pulling a "bait-and-switch" as it implements the $700 billion Wall Street rescue plan approved by Congress last month.

Treasury Secretary Henry A. Paulson Jr. earlier this week confirmed that the bailout funds would be used primarily to re-capitalize banks and other financial firms through direct stock purchases, not to purchase "toxic" mortgage and other assets from lenders as the Bush administration originally intended.

Assistant Treasury Secretary Neel Kashkari, the department's point man for the bailout, heard complaints from both Republican and Democratic lawmakers at an oversight hearing on the roll-out of the plan, designed to thaw frozen credit markets and prevent a larger economic implosion.

"This is a classic bait-and-switch," said Rep. Dennis Kucinich, Ohio Democrat and chairman of the House Oversight and Government Reform subcommittee monitoring the bailout, saying lawmakers had reluctantly supported the bill because they thought it would used directly to purchase assets and help struggling homeowners facing foreclosure.

He complained that banks that were getting the government aid were using it not to make new loans but to build up their capital base and acquire other banks.

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"Secretary Paulson's policy reversal breaks with Congressional intent, contradicts public assurances previously made by Treasury, and leaves the federal government without an adequate mechanism to stem a tide of home foreclosures," he said.

California Rep. Darrell Issa, the panel's ranking Republican, said during the debate on the bill Mr. Paulson "gave us all assurances that he aimed to get rid of these [toxic] assets by selling them off. He got the money and immediately said, 'What auction?'"

Mr. Kashkari said the Treasury Department was "using all the tools" from the emergency legislation to deal with the financial crisis. Using the $700 billion solely to buy up bad mortgages would only help roughly 3.5 million homeowners, he argued, while stabilizing the U.S. banking sector and revamping government guidelines on mortgage lending would help all mortgage holders, he said.

"Our system is stronger and more stable than just a few weeks ago," he said.

He said the Federal Deposit Insurance Corp. and other federal regulators are pressing the banks they oversee to make new loans and offer relief to existing homeowners struggling to make their payments, although he acknowledged there was no "contractual" obligation on the banks accepting taxpayer aid to make new loans.

The Treasury Department was "aggressively" looking at other ways to help homeowners facing foreclosure, Mr. Kashkari said.

The House panel's complaints echoed criticisms lodged a day earlier in the Senate, where a number of lawmakers said they were frustrated about the abrupt shift in the administration's strategy, the lack of communication with Capitol Hill and the continuing record number of mortgage foreclosures despite the bailout spending to date.

A trio of Republicans -- Sens. Tom Coburn of Oklahoma, Richard Burr of North Carolina and David Vitter of Louisiana -- said in a letter to Mr. Paulson Thursday that such a "rapid reversal" raised questions about the department's future plans for the rescue funds.

Mr. Kashkari said about $290 billion of the first $350 billion from the bailout package has already been spent or pledged, with all the money so far used to buy stock in banks and financial firms and to finance the bailout of troubled insurance giant AIG. Mr. Paulson has resisted calls from congressional Democratic leaders to use some of the bailout money to help Detroit's Big Three automakers.

Congress can veto the second tranche of $350 billion approved in the law, and a number of lawmakers are talking of putting explicit conditions on how the new money is spent.

Mr. Kashkari said Friday Mr. Paulson had made no decision on when to ask for the second $350 billion.