Paulson, Congress Clash Over Use of Bailout Fund

Treasury Secretary Henry Paulson and members of Congress locked horns over a $700 billion financial bailout fund, with lawmakers demanding money to stem foreclosures and Paulson arguing it was meant for investing in financial companies.

AP Henry M. Paulson, US Treasury Secretary

At the beginning of a House Financial Services Committee hearing where he faced a grilling over his handling of the program, Paulson insisted that injecting capital into banks was the most effective way to restore confidence and stabilize the financial system.

• Read Paulson's Statement
• Read Bernanke's Statement
• Read Sheila Bair's Statement

Federal Deposit Insurance Corp Chairman Sheila Bair, however, told lawmakers it was "essential" Treasury offer loan guarantees and credit help to slow home foreclosures under the bailout approved by Congress last month.

The $700-billion program, the government's central effort to ease a credit crisis that has put the U.S. and world economies at risk, was originally intended to buy bad loans from banks.

The Treasury has scrapped that plan and has focused on using it to buy equity in financial institutions.

For the Investor:

• Pros Say: A Commodities "Super Cycle" in 2010
• Chinese Stimulus Plan Should Help Consumption
• Best Trades Now: Big Names, Strong Balance Sheets
• Stock Picker: These Names Are 'A Steal'
• Stimulus Plan for Economy Looking Unlikely This Year
• Four 'Black Ink' Stock Picks
• A Classic Dividend Stock — An 'Attractive' Price

Some $290 billion of the first $350 billion authorized under the program already has been used or committed for use, and Paulson said he wanted to reserve the balance of it for the incoming administration of President-elect Barack Obama, who takes office on Jan. 20.

"This financial crisis is unpredictable and difficult to counteract," Paulson said. "So early last week, we concluded it was only prudent to reserve our ...capacity, maintaining not only our flexibility, but that of the next administration." (See video of Paulson's testimony, left.)

Committee Chairman Barney Frank, a Massachusetts Democrat, sharply differed with Paulson, who said he had "reservations" about using bailout funds to ward off foreclosures.

"The fundamental policy issue is our disappointment that funds are not being used out of the $700 billion to supplement mortgage foreclosure reduction," Frank said. "There, I believe, is an overwhelmingly and powerful set of reasons why some of the...money must be used for mortgage foreclosure (mitigation)."

Congress to Big Three Auto Makers: Get Your Act Together!

While he said he had reservations about proposals that had been offered, Paulson told lawmakers he had not flatly ruled out using bailout funds to stem the rising tide of foreclosures.

Rising U.S. mortgage defaults has touched off a global credit crisis that economists say threatens to push the U.S. economy into a long and severe recession.

Bair, whose agency insures bank deposits, said some of the bailout money should be used to help homeowners in trouble because current federal programs were inadequate. She said an estimated 4 million to 5 million mortgages will enter foreclosure over the next two years if nothing is done.

Federal Reserve Chairman Ben Bernanke, appearing on the same panel, said using the bailout money to inject capital into banks "will be critical for restoring confidence and promoting the return of credit markets to more normal functioning."

He said there were some signs of a return to more normal conditions in credit markets but said conditions were still unsettled and many banks continued to restrict their lending throughout October.

Copyright 2008 Reuters. Click for restrictions.