Paulson argues RTC-style rescue too costly

Treasury Secretary Henry Paulson has defended the US government’s decision to use the $700 billion bailout package to inject capital directly into financial institutions rather than buy up large portfolios of troubled mortgage assets – because it would cost too much money.

In an editorial, published in the New York Times today, Paulson said for the Troubled Asset Relief Programme (TARP) to be effective it would “require a huge commitment of money”. And although $700 billion would have had a significant impact, he said, the worsening economic situation meant that “half of that sum … simply isn't enough firepower.”

Paulson has come under fire for injecting capital directly into banks and other financial organisations, rather than buying up toxic real estate-related assets and securities as TARP originally intended, with Philip Feder, global chair of law firm Paul Hastings’ real estate group, recently telling PERE taxpayer-funded infusions were leading to a “classic stalemate” that was exacerbating the current market dislocation.

An entity similar to the Resolution Trust Corporation, which was created in 1989 following the US savings and loans crisis in order to buy assets from failed institutions, would break the “log jam”, he said.

Today, though, Paulson said the financial crisis had been “unpredictable and difficult to counteract”, adding that the government had been “prudent” to reserve the TARP money “not only [for] our flexibility, but also that of the next administration” of Barack Obama. The current $250 billion capital purchase programme was, he stressed, “strong medicine for our financial institutions.”

He went on to say: “There is no playbook for responding to turmoil we have never faced. We adjusted our strategy to reflect the facts of a severe market crisis, always keeping focused on our goal: to stabilise a financial system that is integral to the everyday lives of all Americans.

“We have done what was necessary as facts and conditions in the market and economy have changed, adjusting our strategy to most effectively address the crisis. We have preserved the flexibility of President-elect Barack Obama and the new secretary of the Treasury to address the challenges in the economy and capital markets they will face.”