Paulson shifts focus of rescue to consumer lending

US Secretary Henry Paulson plans to use the second half of the $700 billion financial rescue program to help relieve pressures on consumer credit, scrapping an effort to buy devalued mortgage assets.

“Illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards,” Paulson said on Wednesday in a speech at the Treasury in Washington. “This is creating a heavy burden on the American people and reducing the number of jobs in our economy.”

Treasury and Federal Reserve officials are exploring a new “facility” to bolster the market for securities backed by assets, Paulson said. Officials are considering using a portion of the bailout money to “encourage private investors to come back to this troubled market,” he said.

The Treasury chief said the department is also considering having companies that accept new taxpayer funding get matching private capital.

Buying “illiquid” mortgage-related assets — the reason the Troubled Asset Relief Program was established a month ago — is no longer being considered, he said.

“Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role,” he said.

Paulson has committed all but $60 billion of the initial $350 billion allocated by Congress to take equity stakes in banks and in insurer American International Group Inc. Lawmakers, who could reject Treasury requests for the remaining $350 billion, are pushing for aid to automakers including General Motors Corp. Paulson is resisting.

With less than three months left in the Bush administration, demands for assistance from foundering companies will likely escalate. The Treasury two days ago took a $40 billion stake in AIG. American Express Co this week converted into a bank-holding company, making it eligible for funds.

Democrat Barack Obama assumes the US presidency on January 20. Obama last week said his economic team will “review the implementation” of the rescue plan, suggesting he may have different priorities for its use.

In his remarks on Wednesday, Paulson said that the Bush administration “has taken the necessary steps to prevent a broad systemic event.”

Still, the secretary said that conditions remain “fragile” and that the stability of the financial system continues to be his highest priority.

Paulson also said that the Treasury will continue to look for strategies to help homeowners avoid foreclosure.