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US backs away from buying troubled mortgage assets

Hank Paulson, US Treasury Secretary, said today buying troubled assets is not the most effective way to use TARP funds.

The prospect of the US government buying up large portfolios of troubled mortgage assets under the Troubled Asset Relief Program looked more distant today after Hank Paulson, US Treasury Secretary, said he was favouring a second round of capital injections into financial organisations instead.

He said in a statement that his staff were still busy examining the merits of buying up troubled illiquid assets using the $700 billion TARP. However, he added the Treasury’s assessment was that it is not the most effective method at this time.

He said: “Over these past weeks we have continued to examine the relative benefits of purchasing illiquid mortgage-related assets. Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources, in helping to strengthen our financial system and support lending.”

Paulson went on to mention other strategies involving further leveraging the impact of a TARP investment by attracting private capital, “potentially through matching investments.”

Other strategies he mentioned included supporting consumer access to credit outside of the banking system and mitigating mortgage foreclosures.

A major dilution of a plan to buy up assets is likely to disappoint advocates of a response to the current financial crisis that would mirror that of the late 1980s and early 1990s when the Resolution Trust Corporation (RTC) was created.

Philip Feder, global chair of law firm Paul Hastings’ real estate group, told PERE recently that failure by the US administration – and governments globally – to force banks to sell their bad assets in return for taxpayer capital infusions had led to a “classic stalemate” that was exacerbating the current market dislocation.

An entity similar to the RTC, created following the savings and loans crisis of the 1980s and 1990s to buy assets from failed institutions, would break the “log jam”, he said.