Paulson Goes Preemptive On Congress

Wondering what was really going on with Hank Paulson telling the Wall Street Journal he wasn’t planning on spending the rest of the TARP? Our friends on Capital Hill say it was all about letting Capitol Hill know they should abandon their plans to rake Paulson over the coals.

Many members of Congress were preparing to attack Paulson for his quick changes on the bailout. Basically, they were going to give Paulson the same treatment they gave his deputy, Neil Kashkari. At the House Oversight Committee hearings, Congressmen called Kashkari a chump and accused theTreasury of pulling a bait-and-switch by using the TARP to buy equity stakes in banks instead of buying up troubled assets.

The risk of launching this kind of attack was that the switch was fully supported by Democratic leaders on the House. Barney Frank, for instance, urged the idea of buying equity stakes even before it was proposed by the Treasury. But Congressmen figured Paulson would be reluctant to fight back because they hold the purse strings to the second half of the TARP. The law authorizing the expenditures require Congressional approval before the second tranche of funds can be spent.

By telegraphing that he doesn’t plan to spend the additional money, Paulson basically disarmed Congress. He doesn’t need their approval, and doesn’t need to hold back if they launch unfair attacks against him. In effect he sent a warning shot: “You got nothing on me, so watch yourselves. I need you less than you need me right now.”

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