Paulson shifts course, won't buy troubled assets

Paulson said some of the bailout money also should be used to support efforts to keep mortgage borrowers from losing their homes because of soaring default levels.

He said a proposal to use some of the funds to guarantee mortgages that have been reworked to reduce monthly payments for borrowers is an approach the administration continues to discuss. But he indicated it would not be a part of the rescue program because it went beyond the intent of the legislation Congress passed on Oct. 3.

Asked about what he had in mind to expand the rescue effort to support credit card and other types of consumer debt that is backed by selling securities, Paulson said it would probably take weeks to design the new program and more time to get it implemented, a possible sign that any such proposal would have to be put into place by the incoming administration of President-elect Barack Obama.

Paulson said this weekend’s first-ever summit of leaders of the Group of 20 major industrial and developing countries needs to focus first on how to repair the financial system as a way to bolster the global economy.

Paulson also praised a new set of guidelines issued by the Federal Reserve and other bank regulators, saying that they addressed a crucial issue of making sure that banks continue to lend at adequate levels.

The guidelines urge institutions to continue lending to credit worthy borrowers and to work with mortgage borrowers to avoid defaults. In addition, the guidelines encourage the banks to set dividend payments for shareholders and compensation for executives with the current crisis in mind.

The guidelines address criticism that banks obtaining funds from the rescue plan are simply using the money to replenish their balance sheets and make acquisitions rather than lending more money to businesses and consumers.

“If underwriting standards tighten excessively or banking organizations retreat from making sound credit decisions, the current market conditions may be exacerbated, leading to slower growth and potential damage to the economy,” the regulators said in a joint statement.

The Fed, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, and Office of Thrift Supervision said all financial institutions were expected to follow the new guidelines, even those not receiving federal assistance.

In addition to the $250 billion committed to the purchase of bank stock, the Bush administration this week allocated another $40 billion toward a $150 billion bailout of troubled insurance giant American International Group.

That leaves only $60 billion of an initial $350 billion approved by Congress under the bailout bill. To access the second $350 billion, this administration or the next will have to make a request to Congress for the money.

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