Bailout reinventions rattle the markets

Confusion exacerbates turmoil, analysts and lawmakers say

WASHINGTON -- Financial markets hate uncertainty, but that's what they're getting from Washington.

The Treasury Department's frequent, scattershot revisions to the $700 billion financial bailout have shaken investor confidence, and experts say the confusion could delay the lending revival necessary for an economic recovery.

Treasury Secretary Henry Paulson has repeatedly surprised lawmakers and financiers with reversals of earlier statements in the six weeks since Congress passed the package.

Last week, Paulson abandoned the initial centerpiece of his pitch to Congress: a plan to buy troubled assets that have clogged bank balance sheets. Stocks plunged on the news, with investors saying they had based business decisions on Treasury's insistence that the program was on track.

And Monday, Paulson said he would not ask Congress for the second half of the $700 billion. That dashed hopes he would follow through on a plan he had announced five days earlier to use the money to ease access to home, school and auto loans.

It was the latest in a series of gyrations that have heightened confusion in markets already rocked by a global financial crisis and grim economic news.

"Markets react very badly to uncertainty, and Treasury and Paulson are not making decisions in such a way that uncertainty goes down," said Mauro Guillen, director of the Wharton School's Lauder Institute. "This is only going to exacerbate the problem."

The recent decision not to seek the second $350 billion is "very counterproductive," because it intensifies the inevitable market uncertainty surrounding the coming political transition, he said.

Paulson has defended his leadership, saying flexibility is needed to deal with changing conditions.

"There is no playbook for responding to turmoil we have never faced," the secretary told a House hearing Tuesday. "We adjusted our strategy to reflect the facts of a severe market crisis."

Treasury's fits and starts have stirred already-shaken markets and made it harder for financial institutions to take calculated risks, said Wayne Abernathy, a former assistant treasury secretary now executive vice president of the American Bankers Association.

In a series of interviews, former Federal Reserve and Treasury officials, economists and policymakers criticized Treasury's erratic approach to the bailout program. They said it's spreading confusion even before the bailout program has had time to produce economic benefits for most consumers and businesses.

A Treasury spokeswoman did not return calls seeking comment.

Robert Eisenbeis, a former Atlanta Fed economist, likened Treasury's piecemeal approach to water torture.

Because "scare tactics were used to stampede a vote" on the bailout legislation, Eisenbeis said, Treasury's turnabouts suggested "a lack of understanding of what the problems were to start with."

Paulson, on Capitol Hill Tuesday for a hearing of the House Financial Services Committee, was lambasted by lawmakers for his stewardship of the program.

"You seem to be flying a $700 billion plane by the seat of your pants," said Rep. Gary Ackerman, D-N.Y. "It seems to be the second-largest bait-and-switch scheme that history has ever seen, second only to the reasons given to us to vote for the invasion of Iraq."

Critics who say the government response to the crisis has been haphazard point to policy changes including the decision to prop up insurance giant AIG a day after Lehman Brothers was allowed to file for bankruptcy.

They also cite last week's announcement that Treasury would abandon its asset-purchase plan after an official testified Oct. 23 to "rapid progress."