ML-Implode News - Paulson Shifts Focus of Rescue to Consumer Lending

U.S. Treasury 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 today 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.''

His remarks are an acknowledgement that the pitch he made to Congress for the bailout hasn't delivered what was promised. Paulson sold the Troubled Asset Relief Program as a way to rid bank balance sheets of illiquid mortgage assets, and he may encounter resistance from Congress for the remaining $350 billion after using most of the first half to buy bank stakes.

Lawmakers will ``put his feet to the fire,'' said Kevin Petrasic, a former official at the Office of Thrift Supervision, now an attorney with the Paul, Hastings, Janofsky & Walker law firm in Washington. ``I'm not sure how you get around dealing with what is clearly the congressional intent.''

So the "swindle" was getting too obvious. But can Paulson force banks, riddled with expanding balance sheet sinkholes, to lend in the very sectors sinking them?

Our guess is the ball will have to be taken away from the failing institutions, and the government will need to instate emergency programs to lend directly to Main Street -- or recapitalize or create local/community banks to do it for them.

As far as Frank's $25B Detroit bailout, even if you acknowledge that the American auto industry is "too big to fail", it still suffers from the flaw of rewarding the failed management with bailout money. The physical plant and supply networks should be preserved; but the companies should have their leadership thrown out as a condition of taking any Federal money. In fact, maybe they should be broken up. They have already grown bigger than they should have and lasted too long on the expectation of bailouts (and actual past bailouts).

Relevant:

Paulson Shifts Focus of Rescue to Consumer Lending