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Salesmen for US bailout face grilling from lawmakers

The two top salesmen for the US$700 billion financial bailout are in for a grilling by US lawmakers just one week after the administration of US President George W. Bush officially ditched the original strategy behind the rescue.

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson were expected to provide greater insights into the shift when they were to testify yesterday before the House Financial Services Committee.

Paulson, who is overseeing the bailout program for the Bush administration, changed course and announced last week that the government would not use any of the money to buy rotten mortgages and other bad assets from banks. That had been the centerpiece of the plan when Paulson and Bernanke originally pitched it to lawmakers.

“Our assessment ... is that this is not the most effective way” to use the bailout money, Paulson said.

Instead, Paulson said the department would focus on rolling out a capital injection program to pour US$250 billion into banks in return for partial ownership stakes in them.

It would also search for new ways to boost the availability of auto loans, student loans and credit cards, he said.

Specifically, the department, along with the Federal Reserve, are exploring using some of the bailout money to bankroll a new loan facility. The aim: helping companies that issue credit cards, make student loans and finance car purchases.

The idea behind the capital injection program is for banks to use the money to rebuild reserves and lend more freely.

However, banks do have the leeway to use the money for other things, such as buying other banks or paying dividends to investors. That has touched a nerve with some lawmakers.

Locked up lending is a prime reason why the US is suffering its worst financial crisis since the Great Depression of 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.

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