The Bush administration is embracing an old adage when it comes to its financial-rescue plan: Try, try again.
WASHINGTON — The Bush administration is embracing an old adage when it comes to its financial-rescue plan: Try, try again.
Urgently shifting course, the administration revamped its $700 billion bailout package by jettisoning the idea of purchasing banks’ distressed assets — the centerpiece of the original plan — and announcing Wednesday that it will search for new ways to shore up not only banks but credit-card, auto-loan and other huge nonbank businesses.
Democrats, meanwhile, are pressing hard to include billions of dollars in help for automakers — over administration objections.
Unimpressed by any of the overhaul talk, Wall Street dived ever lower, with the Dow Jones industrial average plunging 411.30 points, or 4.7 percent, to close at 8,282.66. Both the S&P 500 and the Nasdaq fell 5.2 percent.
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“The facts changed and the situation worsened,” Treasury Secretary Henry Paulson said at a news briefing, explaining the administration’s switch from its plan to help financial institutions by buying up troubled assets, primarily securities backed by bad home loans, and instead continue to focus on direct purchases of bank stock.
Despite its new flexibility, the administration remained opposed to using the rescue fund to bail out the ailing auto industry or to provide guarantees for home loans, an idea that supporters contend offers the greatest hope for helping legions of Americans who are facing foreclosure.
Congressional Democrats felt otherwise on autos, and strongly. House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid were pressing for quick passage of a major package for carmakers during a postelection session that begins Tuesday.
One key House Democrat was putting together legislation that would send $25 billion in emergency loans to the beleaguered industry in exchange for a government ownership stake in the Big Three car companies.
Not all the news was bad, Paulson suggested. He said the rescue program approved by Congress a month ago has already had an impact in dealing with the most severe financial crisis in decades, a credit squeeze that is threatening to push the country into a deep and prolonged recession.
“Our system is stronger and more stable than just a few weeks ago,” he said.
To accomplish those goals, Paulson said the administration would continue to use $250 billion of the $700 billion rescue fund to make direct purchases of bank stock as a way of supplying hundreds and potentially thousands of banks with extra capital in hopes that they will resume more normal lending.
But Paulson said the administration had decided that the original focus of the bailout program — the purchase of distressed mortgage-backed securities and other troubled assets on the books of banks — would not be employed.
He said the administration had changed the emphasis because of a need to get money into the financial system much more quickly because of a worsening credit crunch. Setting up a purchase program for the bad assets was taking too much time, officials said.
Paulson also said the administration was exploring the possibility of setting up a program in conjunction with the Federal Reserve that would provide support for the $1 trillion market in securities that fund such vital consumer products as credit cards, auto loans and students loans.
About 40 percent of consumer credit is supplied through the sale of these securities that are backed by payments consumers make on their credit cards and other loans.
“This market, which is vital for lending and growth, has for all practical purposes ground to a halt,” Paulson said. In response to a question, he said it would take weeks to design a program, which officials suggested might involve having the Federal Reserve provide loans.
The administration has already spoken for all but $60 billion of the initial $350 billion supplied by Congress, including the $250 billion for direct stock purchases from banks and $40 billion for a new loan supplied on Monday to help stabilize troubled insurance giant American International Group.
Paulson said he believed the $700 billion would be sufficient to stabilize the financial system. He would not give an estimate on when Congress would need to authorize the second $350 billion.