Last Hour Selloff Erases Chance for Back-to-Back Gains; Paulson Responds To Criticism

I mentioned this morning that if the SPX closed above 880, it would still be considered a win for the bulls. The SPX closed at 873, so we didn't quite maintain the levels I was looking for. Once again, all of the selling came in the last hour. The Dow was up 50 points with an hour to go, but gave up more than 300 in that last hour.

CNBC interviewed Treasury Secretary Paulson today, and I thought his answers were very good, as well as forthright. The media (and Congress) is up in arms over what they say if flip-flopping on the original TARP plan.

But Paulson responded that he asked Congress for an "arsenal" of tools to use, and that is what he is doing. Moreover, as conditions continue to change, they want to have the flexibility to use what is most appropriate at amerliorating the credit crunch.

The public wants instant gratification in terms of seeing progress from these actions, but all fiscal stimulus takes time, and works its way into the economy with a lag. Always has, always will.

Here are some more highlights from his comments:

• Paulson says the major purpose of the TARP was to stabilize financial system and to get lending going. Paulson says he thinks the system has clearly been stabilized... says this is a healthy bank program... says this was a comprehensive plan that has made a big difference.
• Paulson says a change in strategy occurred when they saw the commercial paper markets freeze up altogether and good mainstream corporation were not able to raise money (highly rated commercial paper issuers)... also says change in strategy occurred because by the time Congress passed bailout, buying distressed assets was not viable... says they changed strategy to address a situation that had gotten much worse.
• Says ultimately, the purpose of TARP is to get capital into banks... Paulson says the crisis was not just about the U.S. subprime market
• On the question of ‘the talk is that banks are taking this money and hoarding it' (e.g. for acquisitions)... Paulson says the first goal was to stabilize the system, and second he says injections into banks will cause banks to lend more money than they normally would have done otherwise... says every bank in the system has benefited from the overall system.
• Paulson says the objective remains the same, which is all about capital... says illiquid assets are still an issue. He thinks the prudent thing to do is not run out and invest all of your money quickly buying illiquid assets if he thinks there's another way to get at this.
• Paulson says, discusses bank investments, says "we will make money." Says this $700 bln is the right amount...he's not saying they are going to need more, but as he evaluated the situation, he thinks be prepared to move ahead with other programs and he thinks it's highly likely that some time in the not-to-distant future to have another capital program within the current $700 bln plan.