WASHINGTON — Faced with exasperated lawmakers upset by shifts in bailout strategy, Treasury Secretary Henry Paulson launched a spirited defense Tuesday of his handling of the $700-billion program and expressed fresh reservations about tapping the pool for mortgage guarantees to relieve skyrocketing home foreclosures.
Members of the House Financial Services Committee grilled Paulson for not doing enough to help distressed homeowners and for failing to force banks that have received bailout money to specifically use it to bolster lending to customers.
"It is essential" that some of the bailout money be used to ease foreclosures, said the panel's chairman, Rep. Barney Frank, D-Mass., a key player in shaping the package Congress passed and President Bush signed into law on Oct. 3.
Amid fits and starts in the administration's rollout and direction of the program, "I have to say at this point that public confidence in what we have done so far is lower than anybody would want it to be, to the point where it could be an obstacle to further steps," Frank lamented.
In a break with the administration, Federal Deposit Insurance Corp. Chairwoman Sheila Bair made a fresh pitch for using $24-billion of the bailout pool to help Americans at risk of losing their homes. House Speaker Nancy Pelosi is urging Paulson to support the FDIC plan.
"As foreclosures escalate, we are clearly falling behind the curve," Bair warned the panel. "Much more aggressive intervention is needed if we are to curb the damage to our neighborhoods and broader economic health."
Although Federal Reserve Chairman Ben Bernanke told lawmakers that in cases of some home loans, the FDIC plan could saddle heavy costs on the government, he said it is still a "very promising approach."
Some Democrats also prodded Paulson to divert $25-billion of the bailout money to help Detroit automakers. Paulson, however, didn't budge in his opposition.
"I don't see this as the purpose" of the bailout program, which is intended to stabilize jittery financial markets and get lending flowing more freely again, Paulson told the panel.
The Treasury chief found himself on the hot seat just one week after he officially abandoned the original rescue strategy of buying rotten mortgages and other bad assets from financial institutions. That had been the main thrust of the plan Paulson and Bernanke originally pitched to lawmakers.
"It appears that you seem to be flying a $700-billion plane by the seat of your pants," said Rep. Gary Ackerman, D-N.Y.
It's crucial that the administration be nimble in assessing changing conditions and adapt the bailout strategy accordingly, Paulson said.
"There is no playbook for responding to turmoil we have never faced," he said. "We adjusted our strategy to reflect the facts of a severe market crisis."
Treasury will focus on rolling out a capital-injection program to pour $250-billion into banks in return for partial ownership stakes in them, Paulson said. The idea behind the capital-injection program is for banks to use the money to rebuild reserves and lend more freely to customers. However, banks do have the leeway to use the money for other things, such as buying other banks, paying dividends to investors or bonuses to executives. That has touched a nerve with some lawmakers.
Locked-up lending is a prime reason why the United States is suffering through its worst financial crisis since the 1930s. All the fallout from the housing, credit and financial crises have badly hurt the economy, which is almost certainly in recession, analysts say.
So far, the Treasury Department has pledged $250-billion for banks and has agreed to devote $40-billion to troubled insurer American International Group — its first slice of funds going to a company other than a bank. That leaves just $60-billion available from Congress' first bailout installment of $350-billion.