Page last updated at 17:23 GMT, Tuesday, 18 November 2008

Clash over $700bn bank bail-out

Henry Paulson's testimony on the bail-out

US Treasury Secretary Henry Paulson has clashed with members of Congress over the $700bn US financial bail-out plan.

Mr Paulson told a Congressional committee that injecting cash into banks was the most effective way to stabilise the financial system.

However critics on the committee said that more of the money should be used to help struggling homeowners avoid losing their homes.

Mr Paulson said the bail-out would not be "a panacea" to cure economic woes.

"It will take a while to get lending going and repair our financial system, which is essential to an economic recovery," Mr Paulson said.

Mr Paulson and Federal Reserve chairman Mr Bernanke were giving evidence to the House financial services committee about the Troubled Asset Relief Programme (TARP) scheme.

The scheme was approved by Congress last month to shore up the US banking system and prevent financial collapse.

Earlier this month, the White House abandoned the original strategy behind the rescue.

Instead of buying up the banks' toxic mortgage debts, as first proposed under the deal, the bail-out fund is being used to buy shares in banks to help boost their balance sheets.

'Financial stabilisation'

Mr Paulson told the committee it was vital the administration be nimble in assessing changing conditions and adapting the bail-out strategy accordingly.

"If we have learned anything throughout this year, we have learned that this financial crisis is unpredictable and difficult to counteract," Mr Paulson said.

About $290bn of the first $350bn authorised under the programme already has been used or committed for use, and Mr Paulson said he wanted to reserve the balance of it for the incoming administration of President-elect Barack Obama, who takes office on 20 January.

3 October - $700bn rescue bill passes through Congress
14 October - Plans announced to buy $250bn in banking stock
26 October - First $115bn spent buying shares in eight lenders
10 November - $40bn to buy further stake in insurer AIG
11 November - Plans to buy troubled mortgage assets abandoned

Focusing the scheme on infusing billions of dollars into banks - to pump up their capital and bolster lending to customers - was deemed a faster and more effective approach to stabilising the financial system, the US Treasury Secretary said.

Explaining the change of strategy, Mr Paulson said that buying the banks' toxic debts would have required a "massive commitment" of money.

He told the committee that as economic and financial conditions quickly worsened, it became clear that the first instalment of the money - $350bn - would not be "enough firepower".

Mr Bernanke said it was "critical for restoring confidence and promoting the return of credit markets to more normal functioning", that the money could be used to inject cash into banks.

Mortgage help

However, Mr Paulson was criticised for not doing more to help struggling home owners avoid losing their homes.

In a disagreement with the White House, Federal Deposit Insurance Corp chairman Sheila Bair, told the committee that $24bn of the bail-out money should be used to help householders.

As the numbers of Americans losing their homes rises, she said the government was "clearly falling behind the curve".

Ms Bair, whose agency insures bank deposits, said some of the bail-out money should be used to help homeowners in trouble because current federal programmes were inadequate.

Democrat Barney Frank, the committee chairman, said: "The fundamental policy issue is our disappointment that funds are not being used out of the $700bn to supplement mortgage foreclosure reduction."

Mr Paulson said he believed the efforts already underway would do "more to prevent foreclosures than might have been achieved through very large purchases of mortgage-related securities through the TARP".

Auto bail-out

GM cars waiting for delivery
The US car industry is in need of resuscitation
Democrats want some of the financial bail-out funds to be used to help the struggling US car industry.

Mr Paulson told the committee that the White House remained firmly opposed to dipping into the $700bn fund to provide the three main US car firms with the $25bn rescue package they are seeking.

The White House says the money should come from funds already assigned to help the car industry.

In a last-ditch bid to save their companies, the bosses of Ford, Chrysler and GM will ask for help later on Tuesday before a Congressional committee.

Their testimony comes as millions of jobs are threatened as the industry's crippling losses are exacerbated by the economic crisis.

Speaking before the hearing, Ford's president Alan Mulally said a failure at even one car company would have widespread consequences.

"The industry is so interdependent. We're nearly 10% of the US GDP, and if one of the automobile manufacturers gets into serious trouble, it has just tremendous implications for the entire industry," he said.

GM has warned it could run out of cash in a matter of weeks and cannot wait until president-elect Barack Obama - who has promised to help the industry - is sworn in.

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