updated 11/18/2008 4:36:41 PM ET 2008-11-18T21:36:41

Faced with exasperated lawmakers upset by shifts in bailout strategy, Treasury Secretary Henry Paulson launched a spirited defense Tuesday of his handling of the $700 billion program and expressed fresh reservations about tapping the pool for mortgage guarantees to relieve skyrocketing home foreclosures.

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Members of the House Financial Services Committee grilled Paulson for not doing enough to help distressed homeowners and for failing to force banks that get some of the bailout money to specifically use it to bolster lending to customers, one of the prime reasons behind the rescue package.

"It is essential" that some of the bailout money be used to ease foreclosures, said the panel's chairman, Rep. Barney Frank, D-Mass., a key player in shaping the package that Congress passed and President George W. Bush signed into law Oct. 3.

Amid fits and starts in the administration's rollout and direction of the program, "I have to say at this point that public confidence in what we have done so far is lower than anybody would want it to be, to the point where it could be an obstacle to further steps," Frank lamented.

In a break with the administration, Federal Deposit Insurance Corp. Chairman Sheila Bair, made a fresh pitch for using $24 billion of the bailout pool to help Americans at risk of losing their homes. House Speaker Nancy Pelosi is urging Paulson to support the FDIC plan.

"As foreclosures escalate, we are clearly falling behind the curve," Bair warned the panel. "Much more aggressive intervention is needed if we are to curb the damage to our neighborhoods and broader economic health."

Although Federal Reserve Chairman Ben Bernanke told lawmakers that in cases of some home loans, the FDIC plan could saddle heavy costs on the government, he said it is still a "very promising approach."

While Paulson was resistant to using some of the bailout money to provide mortgage guarantees, he said the administration will look for ways to provide foreclosure relief.

Some Democrats also prodded Paulson to divert $25 billion of the bailout money to help Detroit automakers. Paulson, however, didn't budge in his opposition.

"I don't see this as the purpose" of the bailout program, which is intended to stabilize jittery financial markets and get lending flowing more freely again, Paulson told the panel.

The Treasury chief found himself on the hot seat just one week after he officially abandoned the original rescue strategy of buying rotten mortgages and other bad assets from financial institutions. That had been the main thrust of the plan Paulson and Bernanke originally pitched to lawmakers.

Focusing the bailout program on infusing billions into banks — and possibly other types of companies — to pump up their capital and bolster lending to customers was deemed a faster and more effective approach to stabilizing the financial system than the original centerpiece of the plan, Paulson said.

Buying financial institutions' toxic debts would have required a "massive commitment" of the bailout money, Paulson told the panel. As economic and financial conditions quickly worsened, it became clear that the first installment of the money — $350 billion — for that purpose "simply isn't enough firepower," he said.

It's crucial that the administration be nimble in assessing changing conditions and adapt the bailout strategy accordingly, Paulson said.

"If we have learned anything throughout this year, we have learned that this financial crisis is unpredictable and difficult to counteract," he said. "There is no playbook for responding to turmoil we have never faced. We adjusted our strategy to reflect the facts of a severe market crisis."

But lawmakers worried the administration was sending confusing signals to taxpayers and Wall Street investors.

"It is in the best interest of, not only the economy, but also of the public, that as we shift and improvise on occasion that we clearly communicate the objective and the basis for what we're doing," said Rep. Spencer Bachus, R-Ala. "I have a particular concern and that's that we don't appear to have an exit strategy."

Treasury will focus on rolling out a capital injection program to pour $250 billion into banks in return for partial ownership stakes in them, Paulson said. And, the department will search for new ways to boost the availability of auto loans, student loans and credit cards, which have been become harder to get due to the credit crisis.

Specifically, the department along with the Federal Reserve, is exploring using some of the bailout money to bankroll a new loan facility designed to help companies that issue credit cards, make student loans and finance car purchases. Paulson said he expected putting up only a "relatively modest share" of the bailout money for this facility.

So far, the Treasury Department has pledged $250 billion for banks and has agreed to devote $40 billion to troubled insurer American International Group_ its first slice of funds going to a company other than a bank. That leaves just $60 billion available from Congress' first bailout installment of $350 billion.

Paulson said he is not planning to initiate another capital injection program beyond those already announced. Thus he's unlikely to tap the remaining $350 billion before the Bush administration leaves office on Jan. 20.

The idea behind the capital injection program is for banks to use the money to rebuild reserves and lend more freely to customers. However, banks do have the leeway to use the money for other things, such as buying other banks, paying dividends to investors or bonuses to executives. That has touched a nerve with some lawmakers.

"My constituents are telling me that many of them still cannot get access to credit," said Rep. Carolyn Maloney, D-N.Y.

Locked-up lending is a prime reason why the U.S. is suffering through the worst financial crisis since the 1930s. All the fallout from the housing, credit and financial crises have badly hurt the economy, which is almost certainly in recession, analysts say.

Paulson said the U.S. had "turned a corner " in averting a financial collapse, but he warned "there's a lot of work that still needs to be done in terms of the recovery of the financial system."

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