On November 10, the Treasury and Federal Reserve Bank of New York announced a plan to further aid stricken insurer AIG, involving the government-backed purchase of up to $70 billion of bad collateralised debt obligations of asset-backed securities (ABSs).
Despite this, he pointed to a number of other measures the Treasury would use to try to alleviate the pressure of illiquid assets. They include strengthening the balance sheets of financial institutions through more capital injections in troubled firms. In future, he suggested, non-financial institutions could also come under the remit of the Tarp, and matched funding from private investors might also be sought.
Outside of the banking system, he said the Treasury and US Federal Reserve would explore the possibility of easing credit jitters in the ABS market by creating a liquidity facility for AAA-rated ABSs. They were also looking at ways to use the Tarp to encourage private investors to return to the non-bank securitisation market, he added.
Meanwhile, he assured the Treasury was continuing to examine strategies to mitigate mortgage foreclosures - even though it would no longer act as a buyer for many of the souring loans involved. "Maximising loan modifications is a key part of working through the housing correction and maintaining the quality of communities across the nation, and we will continue working hard to make progress here," he declared.
In particular, Paulson held up a modification plan enacted by the Federal Deposit Insurance Corporation for debtors to failed California-based mortgage lender IndyMac as an example for others to follow. The Federal Housing Finance Agency, along with the two government-sponsored mortgage lenders Fannie Mae and Freddie Mac, yesterday unveiled a plan providing help to homeowners more than 90 days overdue on repayments. Both Citigroup and JP Morgan have also announced separate plans for their own mortgage debtors.
Paulson said the Treasury would continue developing plans along the lines of capital injections, unblocking the non-bank ABS market and modifying mortgage loans - while keeping President-elect Obama's transition team apprised of any changes.
On broader market tumult, Paulson noted the housing market fall had "exposed gaping shortcomings in the outdated US regulatory system, shortcomings in other regulatory regimes and excesses in US and European financial institutions".
Prior to the weekend's summit of leaders from the 20 largest global economies in Washington, DC, he said there were a number of issues that needed addressing in the wake of the current financial crisis. These included risk management, compensation policies and oversight of mortgage origination, securitisation, rating agencies and over-the-counter derivatives.
However, he also alluded to one more fundamental problem: "Over a period of years, persistent and growing global imbalances fuelled a dramatic increase in capital flows, low interest rates, excessive risk-taking and a global search for return."
These could not be ascribed to any particular nation, he said, and encompassed low US savings, structural issues in Europe and an accumulation of capital reserves in Asia and oil-exporting countries.
Elsewhere, Paulson said banks that were not included in the Treasury's capital purchase plan had benefited from lower systemic risk - and encouraged them to continue to lend to creditworthy borrowers.
Referring to Fannie Mae's staggering third-quarter loss of $29 billion, released on November 10, he said it was "within the range of what we expected, and further confirms the need for our strong actions" in bailing out the flagging lender.
See also: Treasury and Fed help AIG lay-off CDO risk
Risk USA: Government inconsistency on rescues deepens crisis
US Treasury considering allowing insurers, auto-makers to access Tarp
Congress: US needs regulatory overhaul
Rating agencies "sold their souls"
The week in Risk.net, May 19-25 2017Receive this by email