Bailout Improv: Paulson Rolls Out New TARP

With the first half of the $700 billion TARP program nearly depleted, Treasury Secretary Hank Paulson spoke today to both defend the program, and announce some changes going forward.

Paulson's comments come amid criticism of his handling of the bailout and a political battle over whether the government should rescue U.S. automakers. Assuming the answer is "yes", the debate — starting as early as next week in a lame-duck session — will be over whether or not the funds come from the second $350 billion of TARP money, which requires Congressional authorization (however it's used.)

As for Paulson's defense of TARP: "As I assess where we are today, I believe we have taken the necessary steps to prevent a broad systemic event," Paulson said in prepared remarks. "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."

Key changes to the program, which Paulson hopes will address the ongoing challenges of "a weak economy, especially the housing correction and lending contraction," include:

• Paulson has effectively abandoned the idea of buying bad debt from banks. While this is a step in the right direction, it's an amazing 180-degree turn in a few short weeks.
• Companies like American Express seeking TARP capital going forward may be required to raise private capital first. Again, this is an improvement but notably doesn't apply retroactively to the firms already enjoying government largess.

These changes appear smart, but the bottom line is the government is essentially making this bailout up as it goes along. "Since announcing the [injection of capital into big banks] we have been examining a wide range of ideas that can further strengthen the financial system and get lending going again to support the broader economy," Paulson said.

It's also clear that Paulson still doesn't have the answers ... and maybe not even a clue, which he unwittingly admitted today: "And to adequately reform our system, we must make sure we fully understand the nature of the problem which will not be possible until we are confident it is behind us," he said.

Huh? No wonder Paulson is counting down the days until he's "former Treasury Secretary."