Philip Maddocks: Paulson seeks funding for new rescue plan for his old rescue plan

Philip Maddocks

Treasury Secretary Henry M. Paulson Jr. today sought Congressional approval for an additional $700 billion to fund a new rescue plan for his old rescue plan.

"I am facing a crisis. Inaction is not an option," he told lawmakers while urging them to take quick action. "This problem is still manageable. But it could quickly escalate into something far worse if something isn’t done quickly. Right now, my current rescue plan makes it seem as if I am following the lead of England and other European countries – and I’d hate to think what would happen to me if that were to happen."

Mr. Paulson said the best hope for him was to convince taxpayers that he was still following his old rescue plan, which called for the government to buy distressed securities tied to mortgages, even though last week he had appeared to put that plan aside in favor of a new approach that would have the government inject capital directly into the nation’s banks — in effect, partially nationalizing the industry and fully making him appear to be a policy lackey to Great Britain, which moved swiftly and decisively to provide capital directly to banks.

"The worst thing we could do — as tempting as it may seem — is to allow my old rescue plan to fail," Mr. Paulson said. "Right now we have a crisis in confidence that I can get the job done. But I would caution all Americans to just be patient with me and hurry up and support my rescue plan to rescue my old rescue plan."

The Treasury secretary said he understood the distaste many taxpayers had for his original rescue plan and he could empathize with their reluctance to support his new push to rescue his old rescue plan.

"Frankly, I feel the same way. I don’t like the idea of me coming to the rescue of my old rescue plan, but I have no choice," he said. "To abandon the old rescue plan in favor of the newer, better one would be an admission of failure. That’s not the way we operate."

Mr. Paulson admitted that his original rescue plan "may not be the best idea. It may not even work." He said its main strength, at this point, is that it doesn’t look anything like what is coming out of Britain or France or Germany, and that fact alone "made it worth rescuing."

Mr. Paulson conceded he had little confidence that his original plan of using so-called "reverse auctions," in which financial institutions are invited to compete against each other in offering to sell their mortgage-backed securities at a low price, would work,  especially since mortgage-backed securities pose difficulties because they are extraordinarily complex, difficult to value and come in almost limitless varieties.

But he said he was completely convinced his new rescue plan for his old rescue plan was workable, a sentiment that seemed to be echoed by President Bush during an appearance before reporters in the Rose Garden.

"All of us recognize that this is a Paulson plan crisis, and therefore requires a Paulson plan response, for the good of Mr. Paulson," Mr. Bush said.

 "We want to reaffirm, reinforce our commitment that we’re going to take these actions in a way that doesn’t undermine the Treasury secretary in this country," said the under secretary of the Treasury for international affairs.

Some experts said the delay in carrying out new Paulson rescue plan for the old Paulson rescue plan had only hurt its prospects for success.

"Even if the new plan was adequate to rescue the old plan before, it’s not adequate now to save the Treasury secretary," said a professor of economics at Columbia University’s business school. "If you delay and create uncertainty, the amount of rescue plan you have to put up goes up."

As confidence in Mr. Paulson old rescue plan spiraled further downward during the last 10 days, the Treasury secretary became increasingly worried about its survival .

"Right now there is a lack of liquidity in my thinking. No one — including me — is sure which of my ideas are worthless and which have value," he said.

In Washington, President Bush again tried to reassure Americans that the Paulson’s plan to rescue is old plan would restore confidence in the financial system and unfreeze the Treasury secretary’s thinking.

"These are extraordinary measures, no question about it," President Bush said. "But they’re well thought out, they are necessary, and I’m confident in the long run his plan will come back."

Philip Maddocks can be reached