INSTANT VIEW: Treasury backs off plan to buy toxic assets

NEW YORK (Reuters) - Treasury Secretary Henry Paulson said on Wednesday he was backing away from using a $700 billion bailout fund to purchase troubled mortgage assets in favor of a second round of capital injections into financial institutions that would match with private funds.

KEY POINTS: * Paulson, in an update on the Treasury's financial rescue efforts, said his staff has continued to examine the benefits of purchasing illiquid mortgage assets under the so-called Troubled Asset Relief Program. * "Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources," Paulson told a news conference.

COMMENTS:

ROBERT ANDRES, CHIEF INVESTMENT STRATEGIST, PORTFOLIO MANAGEMENT CONSULTANTS, PHILADELPHIA:

"I think he's out of his mind. I think he is catering to the political whim. Every time he opened his mouth this summer he said we need to fix the housing market and to buy mortgage-backed securities. This whole process got politicized.

"There is no mandate for banks to make loans. Who are they going to lend this money to? We are in a deleveraging economy. The consumers have to deleverage $2 trillion worth of debt. You need to fix the system when people need to borrow money.

"There are mortgages out there with higher risks but there are also good mortgages whose prices are depressed due to guilt by association. You are not going solve the mortgage crisis until you solve the problems with the mortgage-backed securities market which has no buyers."

ARTHUR FRANK, HEAD OF MBS RESEARCH, DEUTSCHE BANK SECURITIES, NEW YORK:

"By saying they are not going to purchase troubled assets it will leave the decision to be made for the next administration. In that they have already done most of the first tranche of the TARP to inject capital into financial institutions, they will not buy troubled assets until for the remainder of the Bush administration, which is just over two months. The decision to do the next tranche is being left for the next administration. No impact on agency MBS market."

RUDY NARVAS, SENIOR ANALYST, 4CAST LTD, NEW YORK:

"It is fascinating that he has backtracked on the asset purchase program and is looking more to buying stakes in financial institutions and not just banks. In retrospect, when we look at other countries, this may have been more of the preferred choice largely because if you buy these assets anyway, the banks are still going to have problems raising capital. So the best bet is just to give them the capital and to let them absorb the losses anyway. That is exactly what looks like is happening.

"Stocks are reacting adversely to it, and my view from a fundamental perspective is that it is largely because the Treasury is going to take larger equity stakes in the banking sector, which is going to dilute shareholder value."

WALTER SCHMIDT, HEAD OF MORTGAGE STRATEGY, FTN FINANCIAL, CHICAGO:

"It doesn't help (non-agency bonds) but the markets have been pretty slow.

"(Treasury officials) have basically have voted with their feet in terms of what they will use the TARP money for. The Democrats wanted to use some for the automakers... and that's not even in the spirit of the law that was passed. The reason there isn't a huge reaction in bonds is there isn't a lot of trading. If they announced they were buying assets then we would have seen (a rally.) The fact that there isn't buying, proves what everybody knows. It's basically codifying that."

HOWARD SIMONS, STRATEGIST, BIANCO RESEARCH, CHICAGO:

"The argument for buying the bad debt was never a strong one to begin with. The problem is and has been declining asset prices in the real estate area. Until you see housing prices stabilize you will continue to have a growing supply of bad loans.

"We have better use for the public money than buying assets or loans that should never have been created in the first place."

BRIAN DOLAN, CHIEF CURRENCY STRATEGIST, FOREX.COM, BEDMINSTER, NEW JERSEY:

"Treasury has dropped the idea of buying troubled mortgage assets and is focusing on supporting consumer credit. 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."

MARKET REACTION: STOCKS: U.S. equity indexes add to losses. BONDS: Treasury debt prices hold gains. DOLLAR: U.S. dollar falls below 96 yen.