The fight over how to use the Treasury’s $700 billion bank rescue fund went into another round on Capitol Hill on Tuesday, with top administration officials testifying that about $60 billion of uncommitted funds should be reserved for potential financial disasters — including another possible big bank failure — rather than bailing out homeowners or the auto industry.
Federal Reserve Chairman Ben S. Bernanke said Tuesday that the severe crunch in credit markets has eased somewhat since last month, but markets remain “far from normal,” and getting loans is still a problem for banks, businesses and consumers.
Further turmoil in markets and the downfall of more big institutions are still possible, he said during an appearance with Treasury Secretary Henry M. Paulson Jr. before the House Financial Services Committee.
Mr. Paulson, for his part, noted that the administration this year “will issue $1.5 trillion of Treasury securities” to finance the Fed‘s and the Treasury’s bank rescue programs, as well as the federal budget deficit — a level of debt many times higher than the government has ever assumed.
Mr. Paulson came under fire from House Financial Services Committee Chairman Barney Frank, Massachusetts Democrat, who charged that Mr. Paulson is failing to carry out the law by refusing to divert money into foreclosure prevention, as Congress directed.
“There, I believe, is an overwhelming and powerful set of reasons why some of the … money must be used for mortgage foreclosure,” he said, advising Mr. Paulson to “let a hundred flowers bloom” by experimenting with ways to help homeowners avoid losing their houses.
Lawmakers praised Federal Deposit Insurance Corp. Chairman Sheila C, Bair, who testified that it is “essential” for Treasury to offer loan guarantees and credit help to slow home foreclosures. She said the Treasury is getting “behind the curve” by not taking more aggressive action.
Mr. Paulson said the Treasury already is providing the most powerful support it can for homeowners by providing backing for Fannie Mae and Freddie Mac to ensure they can keep guaranteeing mortgages with low interest rates.
“I have not said no” to funding a foreclosure prevention effort, Mr. Paulson said, but added he has not found a program that “strikes the right balance” between helping homeowners and protecting taxpayers’ money. “I am looking very hard” for such a program.
Mr. Bernanke fended off criticism of the Fed for not disclosing more about the more than $2 trillion of loan programs for banks and corporations it started this year, which lawmakers said could expose taxpayers to large losses.
It would be “counterproductive” to reveal identities of financial institutions borrowing from the Fed, because “that might create a stigma,” he said. “It’s very safe. We’ve never lost a penny in these lending programs.”
Mr. Bernanke conceded that the massive loan programs, along with the Treasury’s $290 billion of cash infusions for banks and American International Group, so far have had a limited impact, producing only gradual improvements in recent weeks.
The biggest breakthrough is that top-rated corporations, states and cities are able to borrow once again in open markets, he said.
“However, overall credit conditions are still far from normal,” he said, noting that interest rates on most types of loans and bonds remain elevated above levels a year ago, and banks continue to tighten the terms on loans to businesses and consumers.
People and businesses with low credit ratings are still getting pinched hard by the credit crisis, and their problems could get worse as a result of the recent freezing up of markets for securities backed by credit-card and other consumer debt, he said.
“There has been little or no bond issuance by lower-rated corporations or securitization of consumer loans in recent weeks,” he said.
Mr. Paulson said he hopes to help unlock the consumer credit markets by using a “modest” amount of money from the rescue program to establish a facility along with the Fed for purchasing consumer debt securities. He also will use the funds to provide cash infusions for financial corporations that are not organized as banks.
Too little money is left in the program to use it for its originally intended purpose - purchasing troubled mortgage assets from banks, he added.
The Treasury’s $250 billion program for infusing cash into banks has been even more effective than the asset-purchase program would be at enabling banks to overcome their huge credit losses and start lending again, he said.