Treasury Secretary Henry Paulson (Source: Treasury.gov)

“The consumer asset-backed securities market is a source of liquidity to financial institutions that provide federally guaranteed small business loans and consumer lending such as auto loans, student loans, and credit cards,” said Treasury Secretary Henry Paulson at a news conference today.

However, “credit market stresses have led to a steep decline in the third quarter of 2008, and the market essentially came to a halt in October. As a result, millions of Americans cannot find affordable financing for their basic credit needs. And credit card rates are climbing, making it more expensive for families to finance everyday purchases. This lack of affordable consumer credit undermines consumer spending and as a result weakens our economy.”

The Federal Reserve will purchase up to $100 billion in direct obligations from mortgage giants Fannie Mae and Freddie Mac as well as the Federal Home Loan Banks. The Fed also will purchase another $500 billion in mortgage-backed securities, pools of mortgages that are bundled together and sold to investors.

The Fed and the Treasury Department will also lend up to $200 billion to securities dealers and other financial firms that hold AAA-rated securities backed by consumer loans, such as credit cards and auto loans. The program will also cover loans originated by the Small Business Administration (SBA). The Treasury will provide $20 billion from the $700 billion economic bailout to cover potential losses from the program.
The new loans, announced as fresh economic data, are the latest modifications to the largest government bailout in history, a program designed to keep the financial system from pushing the country into a deep and prolonged recession.
The government is seeking to instill confidence in the credit markets, and is hoping to see lenders like credit card companies return to normal levels of lending to help stimulate the economy. Since September, financial institutions have been hesitant to lend money for fear they won’t be repaid.

If successful, the new programs will stimulate consumers and businesses, which the government hopes might push the country’s gross domestic product higher, and increase consumer confidence to help the crippled housing and auto markets.

Meanwhile, the Commerce Department revised reading on the economy’s performance showed gross domestic product shrank at a 0.5% in the third quarter, weaker than the 0.3% decline first estimated a month ago. It is the worst showing since the third quarter of 2001. GDP measures the value of all goods and services produced in the U.S. and is considered the best barometer of the country’s economic fitness.

Quarterly housing prices also dropped by 16.6% compared to the same period a year ago, reports the Standard & Poor’s/Case-Shiller U.S. National Home Price Index earlier this morning. This was the lowest price drop since the first quarter of 2004. Meanwhile, the consumer confidence index, also released today, improved moderately for November was 44.9, up from a revised 38.8 in October.

From left, U.S. Treasury Secretary Henry Paulson, Federal Reserve Bank Chairman Ben Bernanke, and Federal Deposit Insurance Corp. Chairman Sheila Bair testify before the House Financial Services Committee today. (Source: Getty Images)

In prepared testimony to the House Financial Services Committee oversight hearing on the Troubled Asset Relief Program, Paulson said that the program has helped “prevent the collapse” of the U.S. financial system, but there’s still work to be done.

“There is no playbook for responding to turmoil we have never faced,” said Paulson. “We adjusted our strategy to reflect the facts of a severe market crisis always keeping focused on Congress’s goal and our goal – to stabilize the financial system that is integral to the everyday lives of all Americans.”

Members of Congress took Paulson to task on recent changes he made to TARP, expressed their concern about his lack of consistency, and questioned his reasons for not supporting a bailout to automakers.
Also at the hearing were Federal Reserve Chairman Ben Bernanke and Federal Deposit Insurance Corp. Chairman Sheila Bair.
Last week, the Bush administration abandoned the original strategy behind the rescue. Instead of stabilizing the financial system by buying bad assets from financial institutions, the centerpiece of the original plan, the government is now focusing TARP on putting billions into banks to boost their capital and bolster lending to customers.
“We recognized that a troubled asset purchase program, to be effective, would require a massive commitment of TARP funds,” Paulson said. “It became clear that, while in mid-September, before economic conditions worsened, $700 billion in troubled asset purchases would have had a significant impact. Half of that sum, in a worse economy, simply isn’t enough firepower. If we have learned anything throughout this year we have learned that this financial crisis is unpredictable and difficult to counteract. So early last week, we concluded it was only prudent to reserve our TARP capacity, maintaining not only our flexibility, but that of the next administration.

Several members of Congress including Rep. Barney Frank, chair of the House Financial Services Committee expressed concern that the $700 billion given to the Treasury Department isn’t being used appropriately and that the businesses and individuals who need it most do not have access to bailout funds.

“I have serious concerns about the improvised and ad hoc nature of Treasury’s implementation of the Capital Purchase Program and other elements of the TARP,” said Rep. Spencer Bachus (R-AL), a ranking member on the committee in his opening statement. “We all understand that when conditions on the ground change, policymakers must be agile enough to adjust to those changed circumstances.  But changing too quickly, without adequately explaining why you’ve changed or what you’re going to do next, risks sending mixed signals to a marketplace that is in dire need of certainty and a sense of direction.”

Rep. Carolyn Maloney (D-NY), vice chair of the joint economic committee, and Rep. Maxine Waters (D-CA), chairwoman of its Subcommittee on Housing and Community Opportunity chastised Paulson for funding mergers and acquisitions and not getting credit out into the communities.

“The fact that you ignored the direction that this Congress gave you amazes me,” said Waters, who said she had faith in Paulson’s ability to help out homeowners, but is now disappointed that he did not utilize his authority.

Bernanke also defended results of TARP. He cited the distribution of funds to nine banks, a move by the FDIC to extend insurance guarantees to certain transactions that TARP was working.

“These actions, together with similar measures in many other countries, appeared to stabilize the situation and to improve investor confidence in financial firms,” said Bernanke in his testimony. “Going forward, the ability of the Treasury to use the TARP to inject capital into financial institutions and to take other steps to stabilize the financial system–including any actions that might be needed to prevent the disorderly failure of a systemically important financial institution–will be critical for restoring confidence and promoting the return of credit markets to more normal functioning.
Paulson also told Congress that the administration remains firmly opposed to using any part of the financial bailout fund for a $25 billion rescue package for the Big Three automakers.
“There are other ways” to help battered automakers, Paulson said
Auto executives insist they need more emergency loans — on top of the $25 billion already approved — to avert a collapse of one or more of their companies before year’s end.

(Source: General Motors Corp.)

Today, Senate Majority Leader Harry Reid (D-NV) plans to attach a provision to a bill that was passed by the House to extend unemployment insurance. Senate Democrats are hoping to bring the matter to a vote by Wednesday.

Executives from General Motors Corp., Ford Motor Co. and Chrysler L.L.C. are gearing up to appear before the House Financial Services Committee tomorrow to request more governmental assistance in the wake of slowing sales. “U.S. auto industry bankruptcies would have a devastating impact on the domestic economy, many times larger than the aid automakers seek,” said Rick Wagoner, GM chief executive said on Sunday.

Sales of new cars and trucks in the U.S. are projected to decrease 12% this year compared with a year earlier, according to the McLean, Virginia-based National Automobile Dealers Association, reports Bloomberg. Together the Big Three automakers posted a net loss of $7.6 billion.

Congress has already approved a $25 billion loan program through the Department of Energy that requires car makers to produce energy-efficient cars. However, Wagoner suggests that the money from that program won’t reach GM in time to head off bankruptcy or worse.

“This is a national problem, without any question. We’ve got at least 3 million jobs dependent upon this industry surviving. This is not a Big Three problem alone,” said Carl Levin (D-MI), a senior member of the Committee on Small Business and Entrepreneurship, on NBC’s Meet the Press. “This current crisis is a crisis in the economy where there is no credit available to purchase and where people are not buying cars because they are afraid.”

Congress has three options to take in considering a rescue of the auto industry. First, some Democrats in Congress would like for the automaker rescue to come from the $700 billion bailout of the financial industry. Others believe that it would be better to create a separate $25 billion bailout. Lastly, Congress could allow automakers to use the $25 billion that was previously approved for developing energy-efficient cars to aid in their overall financial problems.

The White House opposes giving automakers an additional $25 billion. White House press secretary Dana Perino said giving more funds to Detroit is more of a subsidy that won’t be paid back, whereas the financial industry bailout was an investment.

“TARP was not intended for individual industries,” says Perino, who believes opening up the Troubled Asset Relief Program to the auto industry would not pass the Senate. “TARP was specifically designed to help taxpayers get a return on their investment.We are providing capital. And it has to be paid back.”

Perino said that President George W. Bush wants to help the automakers get through this “rough patch” and provide for their long-term viability, but not at the expense of taxpayers. Bush would prefer that Congress loosen restrictions on the $25 billion already appropriated to build energy-efficient cars and let automakers use the money instead to temper their inclement financial situations.

President-elect Barack Obama has expressed his desire to see a bailout for the Big Three, but has said that if a bailout passed, automakers need to use the opportunity to become more competent manufacturers.

Many Republicans oppose the idea of any type of bailout. They believe that U.S. automakers are in danger of closing because their business tactics have been subpar for several decades and not because of tightened credit markets or poor sales. Sen. Richard Shelby (R-AL), who is the most vocally opposed Republican to an automaker bailout, described a bailout for GM, Ford, and Chrysler as “postponing the inevitable” on Meet the Press.

“I think it’s a mistake. They would be, in a lot of people’s judgment, a lot better off to go through Chapter 11 where they could reorganize, get rid of the management, get rid of the boards, the people who’ve brought them to where they are today,” Shelby said. “This is a dead-end, it’s a road to nowhere, and it’s a big burden on the American taxpayer.”

Last week, Treasury Secretary Henry Paulson agreed with Bush that any assistance for automakers should be separate from the bailout passed in September for financial institutions. Paulson and Federal Reserve Chairman Ben Bernanke, are scheduled to appear tomorrow before the House to update Congress on how the $700 billion bailout is being spent.

To make matters worse, neither automakers nor members of the United Auto Workers (UAW) are open to legislative changes in how they run their businesses. They do not want to make concessions to reduce executive bonuses or wages for union workers or to institute higher mileage standards. All of these actions would encourage lawmakers to push the bailout through.

“We are carefully evaluating programs which would further leverage the impact of a TARP investment by attracting private capital, potentially through matching investments,” he said in a speech that addressed the Troubled Asset Relief Program, the credit crunch, and the government’s efforts to correct the financial meltdown.

He said that the government’s quick action in passing the bailout in October, along with coordination with colleagues around the world, helped stabilize the global financial system.
“As I assess where we are today, I believe we have taken the necessary steps to prevent a broad systemic event. Both at home and around the world we have already seen signs of improvement,” he said today at the Treasury Department. “Our system is stronger and more stable than just a few weeks ago. Although this is a major accomplishment, we have many challenges ahead of us. Our financial system remains fragile in the face of an economic downturn here and abroad, and financial institutions’ balance sheets still hold significant illiquid assets. Market turmoil will not abate until the biggest part of the housing correction is behind us. Our primary focus must be recovery and repair.”

The Dow Jones Industrial Average ended trading today with a third straight day of losses, down 411.30 points, or 4.7%, at 8282.66.

The Treasury Department has just $60 billion left in its rescue fund, and either the current or next administration will have to turn to Congress to request the second half of the promised $700 billion, according to the Wall Street Journal.

Paulson said the Bush administration will continue to use $250 billion of the program to purchase stock in banks in order to encourage them to resume more normal lending. He also announced that the administration was looking at a major expansion of the program into the markets that provide support for credit card debt, auto loans, and student loans.

With approximately 40% of U.S. consumer credit provided through securitization of credit cards, auto loans, and student loans, “this market, which is vital for lending and growth, has for all practical purposes ground to a halt.” Putting an emphasis on lending and growth will help strengthen “our financial institutions and the [increase the] availability of consumer credit, he said.

On the issue of using the $700 billion bailout package to help ailing auto companies, Paulson said the administration preferred an approach that would accelerate support to that industry from other legislation Congress passed this fall.

President-elect Barack Obama and other Democratic lawmakers are pushing the Bush administration to include the Big Three automakers – General Motors Corp., Ford Motor Co., and Chrysler L.L.C.

The White House reports that finance ministers and central bank governors from the Group of Seven nations and other leaders will meet this weekend. “Nations around the world, especially in Europe, are facing severe shortages of their own,” said President Bush as he addressed executives at Guernsey Office Products Inc. in Chantilly, Virginia, yesterday. “So this isn’t a problem just in the United States. It’s a problem that is worldwide.”

Nationwide, the U.S. Treasury Department is gearing up to implement the Troubled Asset Relief Program (TARP) authorized under the $700 billion Emergency Economic Stabilization Act that Congress hesitantly approved and President Bush signed Friday. Under TARP the secretary of the treasury is authorized to purchase, insure, hold, and sell a wide variety of financial instruments.

Now the Treasury is seeking to build public and private partnerships with asset managers and private equity firms who can help them manage the buyback of the bad mortgage debt which has frozen credit markets. The Treasury set a deadline of 5 p.m. (EST) today for financial institutions interested in providing infrastructure, wholesale, and security asset management services for a portfolio of troubled mortgage-related assets. Monday, the Treasury posted three solicitations requesting financial agents to provide services to execute TARP effectively. Financial institutions seeking to procure contracts are scrambling to meet the 5 p.m. deadline.

Also Monday, Treasury Secretary Henry Paulson named Neel Kashkari, the Interim Assistant Secretary of the Treasury for Financial Stability, head of the Office of Financial Stability that will monitor TARP. Kashkari worked for Paulson at Goldman Sachs before serving as assistant secretary of the Treasury for International Economics and Development in 2006.

Although the relief program stipulates that specific procurements be set aside for certain small businesses, the Treasury says that these are not contracts governed by the provisions of the Federal Acquisition Regulation (FAR), a law that requires certain guidelines to ensure participation of small, disadvantaged, and minority firms.

The Treasury expects that contracts will be awarded using procedures that may not include full and open competition, and that FAR provisions will be used when applicable depending on whether the conditions require “unusual and compelling urgency.”

“To be sure, there are many challenges associated with the design and implementation of the TARP, including determining which assets will be purchased and how prices will be determined,” said Federal Reserve Board Chairman Ben Bernanke yesterday at the National Association for Business Economics 50th Annual Meeting in Washington, D.C.”The Treasury, with the advice and cooperation of the Federal Reserve, is working to address these challenges as quickly as possible.”

Estimates from the Congressional Budget Office released yesterday show that the U.S. budget deficit hit a record of about $438 billion in fiscal 2008, which ended Sept. 30. Another indicator showing that the markets are stressed is the Standard & Poor’s 500 stock market index, which fell by more than 25% over the past year.

Home sales rose 7.4% from July to August reported the National Association of Realtors adding the only bit of positive news this morning. Information on contracts awarded by Treasury will be posted on the Federal Business Opportunities Website or on the Federal Procurement Data System Website. Small businesses interested in participating in the procurement opportunity should contact the Treasury’s Office of Small and Disadvantaged Business Utilization at TreasuryOSDBU@do.treas.gov.

John McCain's ad that appeared many hours before the debate. (click to enlarge)

Apparently, somone on the McCain-Palin team is extremely clairvoyant — or extremely optimistic.

Before the McCain campaign had even announced that Sen. John McCain would indeed participate in tonight’s presidential debate in Mississippi, an ad was running alongside an op-ed by Henry Paulson in the Wall Street Journal announcing McCain’s victory, the Washington Post is reporting.

The ad shows the jubilant Arizona senator in front of an American flag gazing at something in the distance, with the text: “McCAIN WINS DEBATE!”

Since McCain has been trying to position himself on the forefront of most of the issues this week, I suppose this ad is just another example of him taking the lead.

Deborah Creighton Skinner is the editorial director for BlackEnterprise.com.