Yesterday, Treasury Secretary Paulson announced significant changes in the implementation and appropriation of funds under the Troubled Asset Relief Program (“TARP”), that was established pursuant to theEmergency Economic Stabilization Act of 2008. The landmark rescue legislation authorized Treasury to purchase and hold up to $700 billion in “troubled assets,” from participating financial institutions. However, to date the Treasury has used its “troubled asset” purchase authority to provide capital to qualified financial institutions under the Capital Purchase Program and, more recently, recapitalizing AIG, and has not purchased the types of “troubled assets” most often discussed when the legislation was considered by Congress.

Secretary Paulson attributed the shift in the focus of the bailout plan, to both the steady and swift decline of the U.S. economy and the considerable time constraints faced with regard to crafting appropriate measures of implementation to purchase “troubled assets” from financial institutions. In light of these obstacles, the Treasury and decision-makers determined that the U.S. economy would benefit significantly by “strengthen[ing] bank balance sheets quickly through direct purchases of equity of banks.” Previously, Treasury had only taken equity positions when necessary to rescue failing financial institutions. Under the Capital Purchase Program, which was announced October 14, 2008, the Treasury committed to purchase up to “$250 billion in preferred stock in federally regulated banks and thrifts.” Secretary Paulson also emphasized that, while the “program’s primary purpose is stabilizing our financial system, banks must also continue lending.”

Since the creation of the Capital Purchase Program, Secretary Paulson noted that the Treasury has been carefully evaluating additional programs designed to stabilize the present economy that would be funded by the remaining TARP funds. He said that Treasury has identified three critical areas in the U.S. financial system that the Treasury that need government assistance:

  •  Reinforce the stability of the financial system: The Treasury is presently evaluating alternative programs to stabilize the financial system, “so that banks and other institutions critical to the provision of credit are able to support economic recovery and growth.” One potential program could include matching investments, where Treasury capital would be matched with capital raised in the private sector. However, in creating a potential matching program, the Treasury would consider the needs of both financial and non-bank financial institutions that are presently not eligible to participate in the Capital Purchase Program
  • Support of key markets that securitize credit: The Treasury is considering initiatives to “support consumer access to credit outside the banking system.” In particular the Treasury intends to focus on the asset-backed securitization market, which as a result of the present market conditions has increased the cost and reduced the availability of certain loans and credit cards. In conjunction with the Federal Reserve, the Treasury is considering the “development of potential liquidity facility for highly-rated AAA asset-backed securities.”
  • Reduce the risk of foreclosure: Recognizing that the Treasury will not be purchasing mortgage-related assets, it is considering other alternatives to forestall mortgage foreclosures. The Treasury is presently working jointly with FHFA, the GSEs, HUD and Hope Now alliance (“a coalition of mortgage servicers, investors and counselors, to help struggling homeowners avoid preventable foreclosures”) in supporting present loan modification schemes. In considering what loan modification scheme is most appropriate for Treasury to adopt, it has looked to the present FDIC mortgage modification model and other mortgage modification proposals.

Noting the G20 summit to be held in Washington this weekend, Secretary Paulson said that the credit crisis and global economic interdependence have both highlighted and “exposed gaping shortcomings in the outdated U.S. regulatory system, shortcomings in other regulatory regimes and excesses in U.S. and European financial institutions.” He further acknowledged that the upcoming G20 summit provides the opportunity for economies around the world to work together in the “ongoing process of recovery and reform.”