Paulson Shuns Direct Auto Bailout

U.S. Treasury Secretary Henry Paulson weighed in with some encouraging things to say about freeing up credit for auto loans, but he stopped well short of promising direct aid for U.S. automakers.

For that, he was roundly criticized by Democratic lawmakers who support an auto industry bailout.

“It is shocking that given the urgent nature of this crisis, the President and the Treasury Secretary appear to be unwilling to support using those tools already at their disposal to provide immediate relief to automakers,” said Rep. John Dingell of Michigan, following Paulson’s remarks on Nov. 12.

By “tools already at their disposal” Dingell is referring to Treasury’s $700 billion Troubled Asset Relief Program. Paulson said in his Nov. 12 remarks he has decided to re-purpose the TARP program. Despite the name Paulson said he has decided that buying up “illiquid mortgage-related assets” is not the best use of the funds.

On a positive note for the auto industry, Paulson said one of his top priorities now is getting the market going again for asset-backed securities. Asset-backed securities are one of the main ways auto lenders raise money with which to make new loans and leases. “This market is currently in distress, costs of funding have skyrocketed and new issue activity has come to a halt,” Paulson said.

Auto lenders package retail finance contracts and in effect sell the income from the loans. The auto lender gets its money back faster, which it can then use to originate new loans. Over the life of the loans, investors collect the money as the loans are repaid.

A big part of what normally makes asset-backed securities attractive is that a company with a lower credit rating can create AAA-rated asset-backed securities by various measures, such as packaging loans from only the most creditworthy customers, and providing ironclad guarantees that the investor will be paid, even if the loans perform worse than expected — even if the lender goes bankrupt. That offers investors security, and means companies can borrow money at cheaper rates. But with investors running scared, the market has largely dried up.

Paulson said he is investigating ways to use TARP money to invest in AAA-rated asset-backed securities. That’s short of a direct bailout, but it would be good news for auto lenders.