Essentially, the government-supported recovery has shifted away from real estate capital markets to consumer liquidity; based on these comments it appears that, for the most part, the remaining TARP funds will be dedicated to freeing up money for credit card financing and auto loans. Additional measures--including a new liquidity facility for these loans--are also under consideration.

The financial system has stabilized, Paulson explained. At the same time, "the important markets for securitizing credit outside of the banking system also need support. Approximately 40% of US consumer credit is provided through securitization of credit card receivables, auto loans and student loans and similar products. This market, which is vital for lending and growth, has for all practical purposes ground to a halt."

Treasury and the Federal Reserve Bank are exploring the possibility of establishing a liquidity facility for highly-rated AAA asset-backed securities, he said. "By doing so, we can lower costs and increase credit availability for consumers." The facility may also support new commercial and residential mortgage-backed securities lending--but its primary focus will be on consumer loans.

Paulson also hinted that Treasury is exploring greater private sector participation in the recovery efforts. "We are carefully evaluating programs which would further leverage the impact of a TARP investment by attracting private capital, potentially through matching investments," he said. "In developing a potential matching program, we will also consider capital needs of non-bank financial institutions not eligible for the current capital program; broadening access in this way would bring both benefits and challenges."

Other highlights from his comments:

• On continued government support for Fannie Mae and Freddie Mac: "As the enterprises go through this difficult housing correction we will, as needed and promised, purchase preferred shares under the terms of that agreement. The US government honors its commitments, and investors can bank on it."
• The role he would like to see the GSEs play in the long term in the housing market: "In my view, government support needs to be either explicit or non-existent, and structured to resolve the conflict between public and private purposes. And policymakers must address the issue of systemic risk. In the weeks ahead, I will share some thoughts outlining my views on long term reform."
• Why he expects banks to begin lending again: "With a stronger capital base, our banks will be more confident and better positioned to play their necessary role to support economic activity. Today banking regulators issued a statement emphasizing that the extraordinary government actions taken by the Fed, Treasury and FDIC to stabilize and strengthen the banking system are not merely one-sided; all banks--not just those participating in the Capital Purchase Program--have benefited, so they all also have responsibilities in the areas of lending, dividend and compensation policies, and foreclosure mitigation."
• The risks he sees in expanding TARP: "Non-bank financial institutions provide credit that is essential to US businesses and consumers. However, many are not directly regulated and are active in a wide range of businesses, and taxpayer protections in a program of this sort would be more difficult to achieve."
• How Treasury will mitigate mortgage foreclosures now that it won't purchase illiquid mortgage assets: "There has been significant work to design and evaluate a number of proposals to induce further modifications [beyond yesterday's announcement]. Each of these would, however, require substantial government subsidies. The FDIC, for example, has developed a proposal that Treasury and others in the Administration continue to discuss. I believe it is an important idea."
• On the risks to this approach: "We must be careful to distinguish this type of assistance, which essentially involves direct spending, from the type of investments that are intended to promote financial stability, protect the taxpayer, and be recovered under the TARP legislation. Maximizing loan modifications, nonetheless, is a key part of working through the housing correction and maintaining the quality of communities across the nation, and we will continue working hard to make progress here."

For more on the bailout, check out:
Real Estate Forum's: "Can $700 Billion Unclog the Credit Spigot?"