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WASHINGTON, DC-This morning Treasury Secretary Henry Paulson gave an update on the agency’s activities of the last several weeks, explaining the thinking behind certain actions–such as the decision to bailout AIG, again–and how those decisions fit in the context of plans for the near term. Sandwiched between this recap of recent events and the future direction of the bailout strategy, was this bombshell for the real estate capital markets: The Treasury Department has decided that purchasing illiquid mortgage-related assets “is that this is not the most effective way to use TARP [Troubled Asset Relief Program] funds.” Instead, the Treasury “will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources, in helping to strengthen our financial system and support lending.”

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:

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