KBW Nasdaq Bank Index (BKX)

[*~1Best~*]

Treasury's Paulson Vague on Auto Bailout Prospects
PAULSON, GEORGE BUSH, AUTO BANKRUPTCY, AUTO BAILOUT, GM, FORD, CHRYSLER, AUTOMAKERS, ECONOMY, CONGRESS
Reuters
| 18 Dec 2008 | 10:14 PM ET

Treasury Secretary Henry Paulson on Thursday offered mixed signals on the chances of a bailout for troubled automakers, saying failure is not an option but adding that any bankruptcy should be "orderly."

His tone suggested there was lingering doubt within the Bush administration on how to deal with the teetering industry.

"President Bush has been pretty clear that, since Congress has failed to act, he wants to take steps to avoid a failure," Paulson said at a Business Week forum. But, he added: "If the right outcome is bankruptcy, then it's better to get there through an orderly process."

Chrysler and General Motors have said Chapter 11 bankruptcy protection would risk causing their suppliers to collapse, driving dealers out of business and compounding job losses at a time when the U.S. economy is already mired in recession.

Paulson also appeared reticent. "This is a time when it makes sense to be prudent," he said.

In addressing broad issues of the financial system, Paulson said the U.S. supervisory system was broken and required an overhaul that could see the Federal Reserve emerge as a mega-regulator that would have power over all large financial institutions.

"The Fed should have oversight over hedge funds," he said. The comments represent a change of heart for the Treasury secretary, who has often said he did not believe hedge funds should be regulated.

The remarks echoed those by President-elect Barack Obama, who promised on Thursday to strengthen financial regulatory agencies and crack down on runaway "greed and scheming" in an effort to restore stability to a reeling U.S. economic system.

Second Guessing

Paulson, who has been widely criticized for not only missing the oncoming financial debacle but also for fumbling various rescue plans, strongly defended his actions.

"The lessons that history teaches us is that the biggest mistake to be made is not doing enough," he said. "The major actions we took, they were the right thing to do."

Asked whether there was a risk of future inflation from throwing so much cash at the nation's financial problems, Paulson played down the risks.

"That will be a high-class problem when we have to worry about inflation and growth," he said. "The bigger risk is to the downside."

With this in mind, Paulson said it was important to enact more direct help for struggling homeowners. He said the White House had not done any more in this area in order not to tie the hands of the incoming administration.

Paulson downplayed the failure of the Bush administration's $700 billion Troubled Asset Relief Program to get banks lending again.

"Lending is much greater than it would have been" without the program, he said.
Copyright 2008 Reuters. Click for restrictions.

URL: http://www.cnbc.com/id/28304582/