Paulson Unveils Phase Two of TARP

By: • Wed, Nov 12 2008, 11:09 AM

Delivering an update to the Troubled Asset Relief Program (TARP), U.S. Treasury Secretary Henry Paulson said that purchasing troubled assets - the original intention of the $700 billion rescue package - is not an effective use of the program.

"It was clear to me by the time the bill was signed on October 3rd that we needed to act quickly and forcefully, and that purchasing troubled assets - our initial focus - would take time to implement and would not be sufficient given the severity of the problem," he said. "In consultation with the Federal Reserve, I determined that the most timely, effective step to improve credit market conditions was to strengthen bank balance sheets quickly through direct purchases of equity in banks."

The move is a departure from the original plan to unfreeze credit markets through the purchase of troubled assets in September.

Instead, Paulson said the money should be used to attract private capital. He also said the private sector must work in tandem with public assistance.

"We are carefully evaluating programs which would further leverage the impact of a TARP investment by attracting private capital, potentially through matching investments," he said.

The Treasury Secretary also noted that prior government actions "have clearly helped stabilize the financial system," and that the steps taken to prevent a systemic collapse have worked.

He also praised the steps taken yesterday to extend the Hope Now Alliance. "With this commitment, the GSEs and large portfolio investors are setting a new industry standard for foreclosure mitigation. Potentially hundreds of thousands more struggling borrowers will be enabled to stay in their homes at an affordable monthly mortgage payment," he said, adding the new initiatives will require "substantial government subsidies."

Prior to the announcement, the Wall Street Journal has published an article suggesting Paulson would modify the TARP to include requirements on attracting private capital to access the program.