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US shifts focus of bailout plans to helping banks

Treasury Secretary Henry Paulson says US authorities will shift the focus of a financial rescue package away from the purchase of mortgage securities to concentrate on injecting capital into the struggling banking sector.

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US authorities have dropped plans to buy up toxic mortgages securities and are shifting the focus of a massive financial rescue plan, Treasury Secretary Henry Paulson said Wednesday.

Paulson said the 700-billion-dollar Troubled Asset Relief Program (TARP) would focus now on continued capital injections to struggling banks, but would also look at ways to help the "nonbank" financial sector.

This could include rescue efforts for credit card and auto loan debt that, like mortgages, is often packaged into securities sold to investors, Paulson said.

"Over these past weeks we have continued to examine the relative benefits of purchasing illiquid mortgage-related assets," he said.

"Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role."

The TARP program approved by Congress was initially aimed at buying up so-called toxic mortgage securities that were clogging the financial system, but analysts had warned that such a plan could prove difficult to implement with prices hard to fix.

In the meantime, US officials had moved to emulate plans in Britain and elsewhere to tackle the credit squeeze by investing directly in banks.

Going further, Paulson said the Treasury would look at other types of consumer credit and asset-backed securities whose markets are frozen.

"The non-bank consumer finance sector continues to face difficult funding issues," Paulson said.

"Specifically, the asset-backed securitization market has played a critical role for many years in lowering the cost and increasing the availability of consumer finance. This market is currently in distress, costs of funding have skyrocketed and new issue activity has come to a halt."

He said this illiquidity in the sector "is raising the cost and reducing the availability of car loans, student loans and credit cards."

He said the Treasury and Federal Reserve "are exploring the development of a potential liquidity facility for highly rated AAA asset-backed securities" that could help this sector, which is outside the scope of regulated banks.

"We are looking at ways to possibly use the TARP to encourage private investors to come back to this troubled market, by providing them access to federal financing while protecting the taxpayers' investment," he said.

"By doing so, we can lower costs and increase credit availability for consumers."

Paulson said the government was also looking at new ways "to mitigate mortgage foreclosures" without purchasing mortgage-backed securities.

One of these efforts announced Tuesday was "an explicit affordability target" set by regulators after taking over one failed bank, IndyMac.

In a related development, US regulators urged banks Wednesday to "fulfill their fundamental role" in the economy by maintaining lending to creditworthy borrowers.

A joint statement by the US Treasury, Federal Reserve and other bank regulators said the economic outlook could be worsened if banks retreat or tighten lending standards too much.

"At this critical time, it is imperative that all banking organizations and their regulators work together to ensure that the needs of creditworthy borrowers are met," the statement said.

"The agencies expect all banking organizations to fulfill their fundamental role in the economy as intermediaries of credit to businesses, consumers, and other creditworthy borrowers."

The unusual joint statement came from the Fed and Treasury with the Federal Deposit Insurance Corp, Office of the Comptroller of the Currency and the Office of Thrift Supervision, all of which play a role in bank regulation.

"If underwriting standards tighten excessively or banking organizations retreat from making sound credit decisions, the current market conditions may be exacerbated, leading to slower growth and potential damage to the economy as well," the statement said.

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