Paulson Leaves U.S. Rescue Funds Up to Obama Team

President-elect Barack Obama is the "decision maker" in spending the rest of a $700 billion financial bailout fund, but should consider continuing bank capital injections, outgoing U.S. Treasury Secretary Henry Paulson said Wednesday.

AP Henry Paulson

Paulson said the Treasury was continuing to work on plans for future capital investments in banks and on "creative ways to leverage the TARP resource for consumers outside the banking system" in his final two weeks in office.

In answers to questions following a speech on the future of mortgage finance, he made clear that these would be recommendations only.

"The only decision-maker as to how that money is going to be used, how those funds are going to be used is going to be the Obama administration," Paulson said.

The Treasury Department must formally request that Congress release the second $350 billion tranche of the Troubled Asset Relief Program. Paulson has allocated $354 billion for bank capital, loans to automakers, financial institution rescues and support for consumer credit.

He said he would work with his nominated successor, Timothy Geithner, to speed the request if asked.

Paulson also recommended that the Obama administration consider converting Fannie Mae

and Freddie Mac to "public utility-like" mortgage guarantors and securitizers.

He said policy-makers need to decide the appropriate level of government subsidy for housing in deciding whether to continue government support for mortgages.

"Government support needs to be either explicit or non-existent, and structured to resolve the conflict between public and private purposes," he said. "Any middle ground is a recipe for another crisis," he said in a speech to the Economic Club of Washington.

Paulson said returning the two companies to their pre-takeover status as privately owned entities with implied government backing, light regulation and massive investment portfolios was "not an option."

Paulson orchestrated the nationalization of Fannie and Freddie in September to keep them from failing and to preserve market stability as their mortgage portfolios deteriorated. The move gave their debt and mortgage-backed securities an explicit government guarantee, putting investors' minds at ease.

Permanently nationalizing the two is a "less-than-optimal" model because that would exclude private-sector credit evaluation and innovation, he said, reducing efficient allocation of resources.

Converting them to privately owned public utilities that guarantee mortgages "could be the best way to resolve the inherent conflict between public purpose and private gain," Paulson said.

Under this model, one or two succeeding entities would purchase and securitize mortgages with a credit guarantee backed by the federal government, but they would not have investment portfolios. Their rate of return for shareholders would be targeted by a rate-setting commission that would also govern new mortgage product introductions.

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