WASHINGTON — Lawmakers engaged in a bipartisan pummeling Tuesday of Treasury Secretary Henry Paulson, sharply criticizing him for — among other things — refusing to create a loan modification program and reversing course on purchasing illiquid assets.
Several members from both political parties on the House Financial Services Committee questioned Mr. Paulson's credibility, suggesting he tricked Congress into giving him $700 billion and is refusing to carry out other provisions of the Oct. 3 bailout law. The skeptical tone of their questions suggested Mr. Paulson could face resistance if he decides to ask Congress for permission to spend the additional $350 billion available under the law.
For many lawmakers, the focus of fury was the Bush administration's unwillingness to adopt a plan from Federal Deposit Insurance Corp. Chairman Sheila Bair to give loan guarantees to lenders that agree to systematic loan modifications.
"She has come up with a way to do a credible loan modification program, and it's been ignored," said Rep. Maxine Waters, the panel's housing subcommittee chairwoman. "You can't do them one by one, Mr. Secretary, and get it done."
Rep. Nydia Velasquez also pressed Mr. Paulson to agree to Ms. Bair's plan.
"You don't have a strategy to work on foreclosures. She does. Are you willing to support her plan?" asked the New York Democrat.
But Mr. Paulson refused to be hemmed in — or even really to tackle the question head on. As has become typical of the former Goldman Sachs CEO, Mr. Paulson stuck to a basic message throughout the hearing, saying capital injections have done more to stabilize the financial system than any other actions.
On the subject of foreclosures, Mr. Paulson tried to deflect criticism by saying he continues to seek new plans to serve the best interest of the taxpayer but without promising any particular action.
"The key to turning around the housing situation and avoiding foreclosures is to keep lending going," he said. "Our actions to stabilize Fannie Mae and Freddie Mac, who are the biggest sources of all financing in America today … are critical. So there are real steps that have been taken to make a difference. More needs to be done. I am hearing your frustration and we are going to keep working on it."
The hearing was unusual in that committee Chairman Barney Frank was a key critic of Mr. Paulson. As the economic crisis has evolved, Mr. Paulson and Rep. Frank have developed an uncharacteristically close working relationship on policy matters.
But the Massachusetts Democrat appeared frustrated with Mr. Paulson during Tuesday's hearing, asking him why he is willing to spend tens of billions to rescue American International Group Inc. but not to use $24 billion to carry out Ms. Bair's plan.
Mr. Paulson said last week that he was concerned about how to pay for the Bair plan, arguing that Troubled Asset Relief Program money was going toward investments, including capital injections, not spending programs.
But Rep. Frank did not buy that argument. He said it was clearly the intent of the bailout law that the money be used for a loan modification program.
"The question is the language in the Tarp," Rep. Frank said, adding that the explicit foreclosure prevention components were "a condition to getting it passed."
"We are talking about $24 billion out of $700 billion — that's about 4% of the total amount," he said. "This is a program that is clearly not just to stabilize but to reduce the amount of foreclosures for good national economic reasons, so its intent couldn't be clearer in my view."
When Mr. Paulson tried to explain, Rep. Frank cut him off.
"It is nobody's view that we have been as successful as we need to be for the sake of the economy in reducing foreclosures," Rep. Frank said.
For her part, Ms. Bair explained the merits of the loan modification program, and said she hoped it would be adopted. Federal Reserve Board Chairman Ben Bernanke, who testified alongside Mr. Paulson and Ms. Bair, took a nuanced stance.
He said Ms. Bair's plan was a "very promising program and I think there are lots of interesting things to talk about here."
He agreed the government has to do more on foreclosures and said he liked the fact Ms. Bair's plan focuses on servicers rather than government involvement, calling this "a plus."
Committee members from both sides of the aisle went on to express frustration that they had had to work hard to convince members to vote in favor of the bailout bill based on myriad promises that have not been fulfilled. Even the purpose of the bill has been reworked. Sold as a bill to buy up illiquid assets, the Treasury has instead used its funding to inject capital into financial institutions.
Lawmakers asked Mr. Paulson to lay out the guiding light behind the initiatives under way and asked for a heads up on what his plans might entail so they can explain to their constituents and are not caught off guard again.
"There is a crisis of confidence that is in [the] general public and within this body of the Congress," said Rep. Paul Kanjorksi, D-Pa., the committee's capital markets subcommittee chairman. "We are trying to figure that out, those of us that extended ourselves on a vote for the bailout and the 180-degree change that you made in the policy from buying bad assets to injecting investments of equity into banking … . It's just an extreme change that was rather shocking."
He said Congress wants "to get some idea: Do we have a plan? Where are we going? … Why can't this Treasury and this White House lay out a plan?"
Rep. Tom Price, R-Ga., echoed these sentiments.
"There is general concern among many of us on both sides, and that is that the federal government is picking winners and losers in this process," he said. "There are some fundamental principles that many of us believe resulted in the remarkable success of the United States over hundreds of years … . What fundamental principles do you believe are consistent with the Tarp program?"
Mr. Paulson explained the crux of the program as "stabilizing our financial system and then helping it recover."
Rep. Gary Ackerman, D-N.Y., said Mr. Paulson appeared to be "flying a $700 billion plane by the seat of your pants." He called the vote for the asset purchase program the "second-largest bait-and-switch scheme" after the reasons given for the war in Iraq.
Rep. Mel Watt, D-N.C., was one of many that said lawmakers were taking heat from constituents for Mr. Paulson's actions.
"A perception is out there and we are having to defend these decisions," he said.