Washington - The two top salesmen for the $700bn financial bailout are in for a grilling by US lawmakers just one week after the Bush administration officially ditched the original strategy behind the rescue.
Federal Reserve Chairperson Ben Bernanke and Treasury Secretary Henry Paulson are expected to provide greater insights into the shift when they testify on Tuesday before the house financial services committee.
Paulson, who is overseeing the bailout program for the Bush administration, changed course and announced last week that the government would not use any of the money 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.
Instead, Paulson said the department would focus on rolling out a capital injection program to pour $250bn into banks in return for partial ownership stakes in them.
It would also search for new ways to boost the availability of auto loans, student loans and credit cards, which have become harder to get due to the credit crisis, he said.
Specifically, the department, along with the Federal Reserve, are 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.
Opposed to using bailout money for automakers
Locked-up lending is a prime reason why the United States is suffering through the worst financial crisis since the Great Depression of 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 US automakers or to provide guarantees for mortgages at risk of falling into foreclosure, another huge source of distress for the economy.
Republican Barney Frank of Massachusetts, chairperson of the panel, has been tapped by House Speaker Nancy Pelosi to draft an aid package for Detroit. The auto companies are seeking $25bn for emergency loans.
In a break with the administration stance, Sheila Bair, chairperson of the Federal Deposit Insurance Corp, who also will testify Tuesday, recently proposed using $24bn of the bailout money to help some American households avoid foreclosure.
So far, the Treasury Department has pledged $250bn for banks and has agreed to devote $40bn to troubled insurer American International Group - its first slice of funds going to a company other than a bank. That leaves just $60bn available from Congress' first bailout instalment of $350bn.
Congressional officials said Paulson indicated he is unlikely to tap the remaining $350bn before the administration leaves office on January 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 authorised to disclose the developments.
- AP