Capital Markets

Paulson: Without Action, Company Credit Woes Could Continue

The Treasury secretary defends his $700 billion buyout plan to Congress.
Sarah JohnsonSeptember 23, 2008

The rippling effect from Wall Street’s turmoil that non-financial companies felt last week would continue if the Congress doesn’t give in to Treasury Secretary Henry Paulson’s plea for the authority to spend $700 billion to buy financial institutions’ illiquid, mortgage-related securities, he suggested at today’s Senate Banking Committee hearing.

“Last week our credit markets froze — even some Main Street non-financial companies had trouble financing their normal business operations,” Paulson said. “If that situation were to persist, it would threaten all parts of our economy.”

Paulson and Federal Reserve chairman Ben Bernanke asked the senators to expedite legislation and keep it flexible enough so that the government could bring stability to the financial markets. The government needs to “stabilize the situation, which is continuing to be more unpredictable and more worrisome,” Bernanke said.

Without intervention, there will continue to be a “major drag on the economy,” Bernanke said, and those entities that did not directly contribute to the financial crisis would continue to feel the fallout, such as non-financial companies’ recent hardships with getting financing.

Both Democrats and Republicans expressed concerns with the Treasury plan in light of other hefty government payouts for Fannie Mae, Freddie Mac, and AIG, along with the reservation that they are being rushed to get legislation passed before they plan to adjourn this week to begin campaigning for the November elections.

Paulson himself acknowledged the speed of his plan hasn’t been ideal, but he insisted it’s necessary. He repeatedly said he is frustrated that taxpayers would be footing the $700 billion bill but that it’s the only way to protect them in the long run from more layoffs, higher unemployment rates, and more foreclosures. “We think it’s the best way to protect the taxpayer… to do something that’s got the maximum chances of working in this marketplace, to calm the market,” he said.

He predicts the government will conduct reverse auctions and other methods for buying the problem assets from thousands of financial institutions, including small banks, credit unions, savings and loans, and foreign institutions.

Committee chairman Christopher Dodd said more long-term regulations for the financial services sector will need to be considered next year, when Congress has more time.

4 Powerful Communication Strategies for Your Next Board Meeting