WASHINGTON - THE Bush administration on Wednesday largely abandoned its plan to buy up toxic mortgage assets and said it will focus its US$700 billion (S$1 trillion) financial bailout fund on making direct investments in financial institutions and shoring up consumer credit markets.

However, that plan never got off the ground and US Treasury Secretary Henry Paulson told a news conference asset purchases were not the most effective use of the funds.

He added, however, that the Treasury would continue to examine the usefulness of 'targeted' purchases. Mr Paulson said he was considering a second round of preferred share purchases in both banks and non-bank institutions which, in a fresh twist, would match privately raised funds.

He also said the Treasury was working with the Federal Reserve on a plan to help restore credit flows to US households by using financial rescue funds to lure investors back to markets for securitised debt, such as car loans, student loans and credit cards.

The administration's shifting focus disappointed Wall Street and US stock prices tumbled sharply. The Dow Jones industrial average closed down 408 points, or 4.7 per cent.

'This hasn't done the Treasury's credibility a world of good,' said Mr Alan Ruskin, chief international strategist at RBS Global Banking and Markets in New York. 'Basically, they found that the market would applaud direct capital injections more readily than understanding the complexities of reverse auctions to buy assets, so it's a pragmatic choice.'

Mr Paulson was unapologetic, saying that by the time the rescue bill was passed on Oct 3, it was clear the asset purchase plan would take too long and would not be sufficient to calm roiling markets.

'I will never apologise for changing a strategy or an approach if the facts change,' he said.

Cool to calls for help
To help ease the crisis, the US Treasury and bank regulators on Wednesday issued 'guidance' for banks encouraging them to lend and to rein in any compensation plans that might lead executives to take excessive risks.

Mr Paulson said the US Treasury was duty-bound to help prevent mortgage foreclosures, but he warned that further aid would likely mean a significant government subsidy, signaling a lack of support for a Federal Deposit Insurance Corporation (FDIC) proposal for more aggressive aid to borrowers.

The regulator for the two largest US mortgage finance companies - Fannie Mae and Freddie Mac - unveiled a plan on Tuesday to cut payments for hundreds of thousands of homeowners behind on their payments. That plan, however, would not touch the many loans held by mortgage investors.

Mr Paulson sidestepped questions on whether the bailout funds would be used to help struggling Detroit automakers. While he said the industry was a 'critical' one for the United States, he said the purpose of the programme was to provide financial system stability.

He said one option would be to amend legislation to allow US$25 billion already approved for efficient vehicle production to be made available more quickly.

So far, the Treasury has focused on providing capital to federally regulated banks and thrifts, but Mr Paulson said it was looking to broaden the effort to cover financial institutions that do not have a federal bank or thrift charter.

'Although the financial system has stabilised, both banks and non-banks may well need more capital given their troubled asset holdings, projections for continued high rates of foreclosures and stagnant US and world economic conditions,' he said.

US$700 billion still enough?
The Treasury has allocated US$250 billion of the bailout funds to inject capital into banks and thrifts and it has earmarked another US$40 billion to shore up AIG, leaving just US$60 billion to dole out before it would have to ask Congress to release the final US$350 billion.

Mr Paulson said he had no timeline for that request, which means the decision could be left to the incoming administration of President-elect Barack Obama, who takes office on Jan 20.

He also signalled he would not seek to increase the overall size of the bailout fund, saying he was 'comfortable' with the amount.

With an aim to restoring credit for households, Mr Paulson said the Treasury and Fed were considering setting up a program to increase liquidity for top-rated asset-backed securities, but he provided few details.

'The initial shock of abandoning Tarp is hitting stocks, but the support for consumer-level lending may be a silver lining as it goes to the root of what's ailing the economy, namely personal consumption,' said Mr Brian Dolan, chief currency strategist at FOREX.com in New Jersey. -- REUTERS