BUSH ADMINISTRATION CHANGES COURSE TO SCREW THE HOMEOWNERS IN FAVOR OF THEIR WALL ST. BUDDIES. LET THEM EAT CAKE. OFF WITH THEIR HEADS.
Democrats lash out at Paulson over mortgages
Frank says some of $700 billion must go to homeowner relief
This is an update to correct the number of mortgages the FDIC plan aims to modify.
WASHINGTON (MarketWatch) -- Democratic lawmakers told Treasury Secretary Henry Paulson on Tuesday that he must reverse course and spend some of the $700 billion in bailout funds to keep individual homeowners from losing their homes.
"Some of this TARP money has to be used for mortgage foreclosure prevention," House Financial Services Committee chairman Barney Frank told Paulson at an oversight hearing on the Troubled Asset Relief Program on Tuesday.
"When the program was passed, very explicit language was included to provide for ... mortgage foreclosure diminution as one of the purposes. There's very specific language in there," Frank said.
Paulson reiterated his opposition to using any of the money to buy mortgage-backed securities or individual mortgages, although that was his original plan in September when he asked Congress for an unprecedented amount of money to keep global credit markets going.
Paulson also opposed a proposal introduced Friday by Federal Deposit Insurance Corp. Chairwoman Sheila Bair, who is seeking to use $24.4 billion of the $700 billion authorized by Congress to modify loans and avert 1.5 million foreclosures.
Video: Paulson, Summers, Rubin debate crisis
Current Treasury Secretary Henry Paulson and predecessors Lawrence Summers and Robert Rubin locked horns over the best way to get the U.S. economy back on track, WSJ's Sudeep Reddy reports. (Nov. 17)
Other Democratic lawmakers also expressed opposition to Paulson's approach of investing money in banks and other financial institutions to bolster their capital and allow more lending.
Rep. Maxine Waters, D-Calif., expressed support for Bair's mortgage foreclosure prevention approach. "The purchase of toxic assets was at the centerpiece of this program, because everybody agreed at that time that the sub-prime meltdown was at the epicenter of the dislocation that we were experiencing in our economy," Waters said.
Rep. Carolyn Maloney, D-N.Y., said she was concerned that the TARP money was being used to fund bank transactions rather than getting credit into communities. "We're basically funding mergers and acquisitions, not lending," Maloney said.
Another Democratic lawmaker, Rep. Nydia Velazquez, D-N.Y., said she was concerned that Paulson's capital injection approach wasn't doing much for Main Street America. "They're still waiting to hear an answer as to how this is benefiting them," Velazquez said.
Paulson said he is sticking with his plan to use the first half of the allocated government capital, $350 billion, to buy significant minority stakes in large, mid-sized and small financial institutions. Paulson said he changed the approach as market realities changed with it.
"Although we are not planning to initiate another capital program beyond those already announced, an emphasis on capital seems to us to be the better strategy going forward," Paulson told lawmakers. "Congress passed legislation to deal with financial instability, and that is what we are doing."
He said the best way to turn around the weak housing market was to "increase access to lower cost mortgage lending."
He argued that the government takeover of Fannie Mae (FNM
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FNM) and Freddie Mac (FRE
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FRE) was an important step in that direction.
Fannie Mae
Sponsored by:
Freddie Mac
Sponsored by:
Overall, Paulson and Federal Reserve Chairman Ben Bernanke defended on Tuesday their stewardship of the $700 billion financial market rescue plan. "A lot of it still hasn't gone out to the banks. I think we've turned the corner in terms of stabilizing the markets and banks, but we will see restoration to lending" Paulson said.
Paulson said that there was "no playbook" for the Bush administration to follow and so strategy had to be adjusted. He said the financial markets would be worse off if Congress had not approved the package.
Bernanke said he saw some improvements in credit markets, but said overall conditions remain "far from normal."
Bair said the FDIC would adopt a Temporary Liquidity Guarantee Program rule on Friday that would seek to unlock inter-bank credit markets and "restore rationality to the credit markets."
Bair's proposal would guarantee new, unsecured debt issued by banks, thrifts and bank holding companies issued between Oct. 14 and June 30. According to her proposal, debt issued cannot exceed 125% of senior unsecured debt that was outstanding as of Sept. 30 and scheduled to mature before June 30. The program provides insurance coverage for deposits typically used by corporations for payroll expenses. 
Greg Robb is a senior reporter for MarketWatch in Washington.
Ronald D. Orol is a MarketWatch reporter, based in Washington.
Ronald D. Orol is a MarketWatch reporter, based in Washington.
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