Paulson, Bernanke Defend $700B Bailout

President George W. Bush

(AP Photo/Susan Walsh)

WASHINGTON (AP) -- Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke are defending their management of a $700 billion financial bailout just one week after the administration abandoned the original strategy behind the rescue.

President George W. Bush's two top salesmen for the bailout program are appearing before the House Financial Services Committee amid some criticism from lawmakers about the Treasury Department's management of the program.

The program was passed by Congress and signed into law by Bush on Oct. 3.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.

WASHINGTON (AP) - The two top salesmen for a $700 billion financial bailout are in for a grilling by Capitol Hill lawmakers just one week after the administration officially ditched the original strategy behind the rescue.

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson are expected to provide greater insights into the shift when they testify Tuesday before the House Financial Services Committee.

In a profile published Tuesday in The Washington Post, Paulson, who is overseeing the bailout program for the Bush administration, said he was also working on a proposal that would allow the government to take over a wide range of financial institutions - not just banks - that are in danger of collapse.

Last week, Paulson changed course and announced that the government would not use any of the $700 billion to buy rotten mortgages and other bad assets from banks. That had been the centerpiece of the plan when Paulson and Bernanke originally pitched it to lawmakers.

"Our assessment ... is that this is not the most effective way" to use the bailout money, Paulson said at that time.

In an op-ed published Tuesday in The New York Times, Paulson wrote: "If we have learned anything throughout this year, we have learned that this financial crisis is unpredictable and difficult to counteract. We decided it was prudent to reserve our (Troubled Asset Relief Program) money, maintaining not only our flexibility, but also that of the next administration."

Still, Paulson said that "recovery will happen much, much faster than it would have had we not used TARP to stabilize our system."

Paulson said last week the department would focus on rolling out a capital injection program to pour $250 billion into banks in return for partial ownership stakes in them. In the Times on Tuesday, he explained that "stronger capitalization is essential to increasing lending, which is vital to economic recovery."

Treasury would also search for new ways to boost the availability of auto loans, student loans and credit cards, which have been become harder to get due to the credit crisis, he said earlier.

Specifically, the department, along with the Federal Reserve, is exploring using some of the bailout money to bankroll a new loan facility. The aim: helping companies that issue credit cards, make student loans and finance car purchases.

The idea behind the capital injection program is for banks to use the money to rebuild reserves and lend more freely to customers. However, banks do have the leeway to use the money for other things, such as buying other banks or paying dividends to investors. That has touched a nerve with some lawmakers.

Locked-up lending is a prime reason why the United States is suffering through the worst financial crisis since the 1930s. All the fallout from the housing, credit and financial crises have badly hurt the economy, which is almost certainly in recession, analysts say.

The administration, however, has remained opposed to using some of the bailout money to help troubled U.S. automakers or to provide guarantees for mortgages at risk of falling into foreclosure, another huge source of distress for the economy.

Rep. Barney Frank, D-Mass., chairman of the panel, has been tapped by House Speaker Nancy Pelosi to draft an aid package for Detroit. The auto companies are seeking $25 billion for emergency loans.

In a break with the administration stance, Sheila Bair, chairman of the Federal Deposit Insurance Corp., who also will testify Tuesday, recently proposed using $24 billion of the bailout money to help some American households avoid foreclosure.

So far, Treasury Department has pledged $250 billion for banks and has agreed to devote $40 billion to troubled insurer American International Group- its first slice of funds going to a company other than a bank. That leaves just $60 billion available from Congress' first bailout installment of $350 billion.

Congressional officials said Paulson indicated he is unlikely to tap the remaining $350 billion before the administration leaves office on Jan. 20. That would mean the incoming Obama administration would decide whether and how the money should be spent. The congressional officials spoke on condition of anonymity, saying they were not authorized to disclose the developments.

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AP Special Correspondent David Espo contributed to this report.

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