Not with a Bang but a Whimper

Two days ago, in my post about AIG, I had the following passage:

In mid-October, Treasury committed $250 billion to explicit recapitalization, but to all intents and purposes seems committed to using some of the other $450 billion to buy those same toxic assets – at what price is still unclear. (Why they would still bother doing this is also unclear, for that matter.)

I meant to expand on that throwaway parenthesis, but I was busy all day today and didn’t get around to it. By the time I got home, I found out that Henry Paulson had scrapped the idea of buying troubled assets altogether (something we’ve favored for a while), saving me the effort of arguing against it.

Unfortunately, after reading Bloomberg, The New York Times, the Wall Street Journal, and the text of Paulson’s remarks, I can’t figure out what they’re doing with the remaining money instead. The main emphasis of the news articles was on the new idea to create a new entity, seeded by TARP money, to lend money against consumer loans, in order to stimulate demand for those loans and hence consumer lending. But this was just one of three possibilities that Paulson mentioned: the others were additional recapitalizations (potentially with a public-private structure, or expanded to a broader range of financial institutions) and a loan-modification program.

While I agree with Andrew Ross Sorkin that it’s a good thing Paulson was able to change his mind about buying illiquid assets, I would feel better if he knew what he was changing his mind to.