Paulson and Bernanke Defend Bailout Program in Congress

U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke testified before Congress on Tuesday, stating that the $700 billion financial sector bailout program is showing progress despite increasing criticism in recent weeks.

Testifying before the House Financial Services Committee, Paulson and Bernanke said they have tried to respond as appropriately as possible in a rapidly changing deep crisis affecting the entire global financial system. “I am very proud of the decisive actions taken by the Treasury, the Fed, and the Federal Deposit Insurance Corporation (FDIC) to stabilize our financial system. We did what was necessary as the facts and conditions in the market and the economy changed,” Paulson said.

The financial leaders of the administration faced the greatest criticism for last week’s decision to change the main method of the bailout program, shifting from purchasing illiquid mortgage securities from bank balance sheets to buying equity stakes in banks. When Paulson and Bernanke first explained the program to lawmakers in September, they emphasized that it was imperative for the government to relieve banks of bad assets. Many representatives on Capitol Hill expressed dissatisfaction with the abandonment of that plan.

Just a few days after Congress approved the bailout legislation, the Treasury Department announced a plan to invest $250 billion directly into financial institutions, buying their shares to help unfreeze the credit market. Half of that amount was allocated to the nine largest banks, including Citigroup, JPMorgan Chase, Goldman Sachs, and Bank of America. An additional $33.56 billion was invested in another 21 banks, bringing the total to $158.56 billion, the Treasury announced on Monday.

Congress members are concerned that these direct investments in banks have not significantly helped unfreeze the credit market, nor have they compelled banks to continue lending to the economy and citizens. Instead, there are concerns that banks are hoarding cash or investing it in acquiring weakened rivals. Paulson explained the strategy change by stating that buying bad debts would have consumed massive resources from the bailout program, and that the first tranche of that $350 billion would simply not be enough.

“There are no instructions for responding to disruptions we have never faced before. We have adjusted our strategy to respond to the facts of this severe market crisis,” Paulson said. Congressman Barney Frank, the committee chairman, warned that the administration is sending confusing signals to taxpayers and expressed “serious concern about improvisations” in the implementation of the bailout program.

So far, the Treasury has allocated $250 billion for bank bailouts and $40 billion for the struggling insurance giant American International Group, leaving $60 billion from the first tranche of $350 billion in government funds. Paulson stated that he does not plan further capital injections from the program, other than those already announced. According to economic analysts, as reported by U.S. television stations, it is unlikely that the Treasury will tap into the remaining $350 billion before the end of President George W. Bush’s administration on January 20, 2009, which would leave the new administration of Barack Obama with the decision of whether and how to spend those funds. (H)