Paulson: Banks Making Progress on Subprime Debt
Treasury Secretary Henry Paulson said Monday that moves by some big banks to bring off-balance sheet investments tied to subprime mortgages back onto their books would help ward off a widespread credit crunch.
"There is no doubt that greater disclosure, which has been driven by investors, is a positive," Paulson told reporters before addressing a community group.
"I think for a great number of financial institutions, standing behind their SIVs and taking them on their balance sheets is a very positive step and it will help move a process along," he said, referring to so-called structured investment vehicles.
Citigroup on Thursday announced it would rescue $49 billion in assets held by its structured investment vehicles, or SIVs, by moving them to its balance sheet. Many SIVs have faced large losses as defaults on U.S. subprime mortgages, traditionally extended to borrowers with spotty credit, have mounted.
Some analysts said Citigroup's decision, along with a similar move by British bank HSBC Holdings, made it unlikely that a plan to create a "super SIV" to buy assets from struggling investment vehicles would get off the ground.
Paulson, who had brokered talks among large banks that had led to a decision to create such a fund, said he still believed one was needed. However, he would not say whether he still
thought one would be in place by year's end.
"I'm optimistic we're making progress here," Paulson said.
Paulson was in Florida to meet community and business leaders to drum up support for a Bush administration proposal to temporarily freeze interest rates for some subprime mortgage
holders who face high payments as their loans reset.
As mortgage defaults have risen, credit spigots have begun to run dry and many economists have said U.S. recession risks are on the rise.
Speaking to a community group, Paulson expressed faith the economy would steer clear of a downturn. "Overall, the U.S. economy will continue to grow and is fundamentally sound."
He told reporters he knew there was criticism that the administration's plan to help distressed homeowners interfered excessively with the normal functioning of markets, but he said he disagreed.
"I take real exception to that," Paulson said. "What we're doing is working to prevent a market failure," he said, adding that a wave of home foreclosures would only cause harm to everyone and raise the risk of a broader economic downturn.
Paulson called the current situation, in which an estimated 1.8 million subprime mortgages on owner-occupied homes are due to reset within the next two years, "unprecedented" and said it
required some government involvement to help.
He said the fact that many of the mortgages had been packaged into securities sold around the world made resolving the issue "complex and cumbersome."
"I think the proper role for government is to work with the private sector to avoid a market failure," Paulson said, though he added it will take time to work through the turmoil in
credit markets and in the housing sector.