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Treasury Secretary Redefines Bailout

ARI SHAPIRO, Host:

This is Morning Edition from NPR News. I'm Ari Shapiro.

RENEE MONTAGNE, Host:

Steve Inskeep is on assignment. I'm Renee Montagne. The government's $700 billion plan to rescue financial institutions has taken a turn in the opposite direction. The original idea was for the government to buy up bad mortgages and other assets and to take them off the hands of troubled banks. Yesterday, Treasury Secretary Henry Paulson said he is essentially tossing that idea out the window. Instead, he's simply going to give the banks cash in return for stock. And as NPR's Chris Arnold reports, there's another big change.

CHRIS ARNOLD: So far, this bailout plan has focused on propping up the nation's banks. But at a news conference yesterday, Paulson said he now wants to expand that. He wants to include other companies involved in all sorts of credit that's extended to everyday people: car loans, student loans, and credit cards. That's a big shift, and it shows just how many important parts of the financial system are currently in trouble.

SHAPIRO: This is creating a heavy burden on the American people and reducing the number of jobs in our economy.

ARNOLD: Paulson zeroed in on what's called securitization. That is when companies make loans or issue credit cards to people and then bundle up that debt and sell it off to investors. Over the years, that's become a giant pipeline for putting cash into people's pockets. It's hugely important to the economy, and there's not nearly enough of it happening right now.

SHAPIRO: Approximately 40 percent of U.S. consumer credit is provided through securitization of credit card receivables, auto loans, and student loans, and similar products. This market, which is vital for lending and growth, has for all practical purposes ground to a halt.

ARNOLD: That doesn't sound very good, especially since consumer spending is the biggest driver of the economy and the country is sliding into a recession. We called up Tom Deutsch, Deputy Executive Director with the industry group the American Securitization Forum.

MONTAGNE: The securitization markets are as frozen as a polar icecap.

ARNOLD: The government's been taking steps to thaw out other parts of the credit markets, and that's been working. But Deutsch says this part of the consumer credit world is still in big trouble. He says when you look at October of this year versus last, there's been a 99 percent drop in the money flowing through the securitization pipeline for mortgages, consumer loans, and credit cards. He says big institutional investors just don't want to buy up new debt.

MONTAGNE: Just as we had irrational exuberance a couple of years ago in terms of capital flowing into the markets, I think you have irrational depression now where investors have a, you know, very pessimistic view, whether that's founded or unfounded, until there is some trigger mechanism to turn the tide.

ARNOLD: Paulson wants to use some of the federal bailout money to try to prime the pump there and get more credit flowing. He hasn't offered details yet, but money could go to a range of companies. For example, Paulson doesn't want to give direct aid to the U.S. automakers, but this new effort might funnel money to firms like GMAC that make auto loans, which would clearly help the carmakers and consumers.

SHAPIRO: There is a tremendous demand for consumer credit.

ARNOLD: Pete Kyle is a finance professor at the University of Maryland. He says people are being squeezed in several ways, given the state of the economy and falling home prices.

SHAPIRO: If you're going to send a kid to college, you might have thought about tapping your home equity. Can't do that anymore. You might have thought about selling some stocks. Well, they may only be worth half what you thought they were worth a few months ago.

ARNOLD: Same thing if you need to buy a car or fix a leaky roof. So getting those car loans or student loans is really important, but some people are having a harder time getting them. That's putting an abnormal drag on the economy at a very bad time. And there's that other big drag on the economy.

SHAPIRO: We're examining strategies to mitigate mortgage foreclosures.

ARNOLD: Under the original plan, Secretary Paulson said he wanted the government to help more people stay in their homes.

SHAPIRO: Now that we are not planning to purchase illiquid mortgage assets, we must find another way to meet that commitment.

ARNOLD: Paulson said he is still considering a plan from Sheila Bair, the head of the FDIC, which could help far more homeowners than any of the other efforts to date. Chris Arnold, NPR News. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

Chris Arnold
NPR correspondent Chris Arnold is based in Boston. His reports are heard regularly on NPR's award-winning newsmagazines Morning Edition, All Things Considered, and Weekend Edition. He joined NPR in 1996 and was based in San Francisco before moving to Boston in 2001.
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