Salesmen for U.S. bailout face grilling

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson are expected to provide greater insights into the shift when they testify Tuesday before the House Financial Services Committee.

Paulson, who is overseeing the bailout program for the Bush administration, changed course and announced last week that the government would not use any of the money to buy rotten mortgages and other bad assets from banks. That had been the centerpiece of the plan when Paulson and Bernanke originally pitched it to lawmakers.

"Our assessment ... is that this is not the most effective way" to use the bailout money, Paulson said.

Instead, Paulson said the department would focus on rolling out a capital injection program to pour $250 billion into banks in return for partial ownership stakes in them.

It would also search for new ways to boost the availability of auto loans, student loans and credit cards, which have become harder to get due to the credit crisis, he said.

Specifically, the department, along with the Federal Reserve, are exploring using some of the bailout money to bankroll a new loan facility. The aim: helping companies that issue credit cards, make student loans and finance car purchases.

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 or paying dividends to investors. That has touched a nerve with some lawmakers.

Locked up lending is a prime reason why the United States is suffering through the worst financial crisis since the Great Depression of 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.

In an interview published Tuesday in The Washington Post, Paulson said he was also working on a proposal that would allow the government to take over a wide range of financial institutions - not just banks - that are in danger of collapse.

The administration, however, has remained opposed to using some of the bailout money to help troubled U.S. automakers or to provide guarantees for mortgages at risk of falling into foreclosure, another huge source of distress for the economy.

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