Paulson, Bernanke Defend $700 Billion Bailout

Updated from 3:25 a.m. EST

By Jeannine Aversa

WASHINGTON -- Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke waged a stout defense on Capitol Hill on Tuesday of their management of a $700 billion financial bailout just one week after the administration abandoned the original strategy behind the rescue.

Focusing the program on infusing billions into banks -- and possibly other types of companies -- to pump up their capital and bolster lending to customers was deemed a faster and more effective approach to stabilizing the financial system than buying rotten assets from financial institutions, the centerpiece of the original plan, Paulson said.

Buying those toxic debts would have required a "massive commitment" of the bailout money, Paulson said in testimony before the House Financial Services Committee. As economic and financial conditions quickly worsened, it became clear that the first installment of the money -- $350 billion -- for that purpose "simply isn't enough firepower," he said.

It is vital that the administration be nimble in assessing changing conditions and adapting the bailout strategy accordingly. "If we have learned anything throughout this year, we have learned that this financial crisis is unpredictable and difficult to counteract," Paulson said.

Treasury and the Federal Reserve are exploring using some of the bailout money to bankroll a new loan facility. The aim is to help companies that issue credit cards, make student loans and finance car purchases.

The idea behind the capital injection program is for banks to use the money to rebuild reserves and lend more freely to customers. However, banks do have the leeway to use the money for other things, such as buying other banks or paying dividends to investors. That has touched a nerve with some lawmakers.