Ignore that man behind the curtain; Reasons for Paulson’s bailout flip-flop.

Treasury Secretary Henry Paulson sold the $700 billion financial bailout to Congress by insisting that emergency cash was needed to get rotting mortgage and other assets off banks’ balance sheets. Now he’s telling a different story:

“Over these past weeks we have continued to examine the relative benefits of purchasing illiquid mortgage-related assets,” Paulson said in a speech today. “Our assessment at this time is that this is not the most effective way to use TARP [Troubled Asset Relief Program] funds.”

Instead, the Treasury secretary announced plans to use the bailout cash for a distinctly different approach to resolving the financial mess: injecting additional capital into banks (potentially expanding the initiative to include non-bank financial institutions), supporting the asset-backed securitization market, and looking at ways to prevent foreclosures.

Lawmakers on Capitol Hill will have smoke coming out of their ears over this change. Critics will call it another example of Paulson’s whack-a-mole response to the worst financial crisis since the Great Depression. Nevertheless, here’s a look at the key reasons behind Paulson’s decision to scrap his original plan to buy mortgage assets from banks:
Read on.