Reviving the credit market was an aim of the Treasury capital purchase program, which infused government money directly in banks. That effort, he said, has stabilized the banks but hasn't created new lending.

Once the centerpiece of Paulson's bailout pitch, the asset purchase program proved unworkable. Treasury wanted to avoid both paying so much that it would be stuck with huge losses and paying so little institutions would take big losses. Figuring out how to arrive at that magical in-between price apparently proved impossible. "Our assessment at this time is that this is not the most effective way to use [the] funds" Paulson said.

That's quite a turnaround from only two months ago, when Paulson told Congress that bad asset purchases were the only way to spend the money. Since Congress passed the bailout, nearly all the money appropriated has been spent making capital investments in banks. Paulson has been slowly moving away from the bill's original intent, earmarking $250 billion to purchase stakes in banks and another $40 billion in added aid to struggling insurer American International Group Inc.

Paulson admits he's made an abrupt change, but is unrepentant. "I will never apologize for changing a strategy or an approach as facts change," he said. He can afford to be unapologetic: He'll be out of office no later than Jan. 20 and it will be his successor's job to judge whether his efforts need to be reworked. President-elect Obama has yet to designate who that will be. During a Nov. 7 press conference, Obama said that after the inauguration his administration will review actions Treasury took and assess whether different steps will be necessary.

How much leeway Obama's team will have to rework Paulson's efforts is a big question. Certainly, the big bank mergers signed so far can't be undone. Bank of America Corp. isn't giving up Merrill Lynch & Co.; Wells Fargo & Co. won't be cutting loose Wachovia Corp.

If Obama is lucky, Paulson's ad hoc efforts will have stabilized the banking system sufficiently so the new administration won't have to engage in the type of financial triage that has consumed the Treasury secretary. Each intervention has required Paulson to respond differently, which has led to tremendous market uncertainty. Will more firms be forced into bankruptcy like Lehman Brothers? Will shareholders be wiped out as they were with Bear Stearns? Will they get to keep a piece as they did with AIG? Will the government broker deals only to renege as it did when it arranged Citigroup Inc.'s purchase of Wachovia then suddenly declared Wells Fargo a better suitor?

"The ad hoc approach has been disruptive to the marketplace," says John Douglas, partner in the Atlanta office of Paul, Hastings, Janofsky & Walker LLP. "Paulson has been making rules on the fly and it's apparent the federal money is being used to separate winners from losers. To the extent the money was supposed to increase lending and stabilize home values, it's not clear it has accomplished either goal."

Banks' unwillingness to increase lending has angered many on Capitol Hill, who criticize Paulson for allowing them to use the money to acquire weaker banks and to maintain dividends and bonuses. This latest improvisation isn't playing well, either. Senate Banking Committee Chairman Christopher Dodd., D-Conn., reacted quickly to Paulson's reverse course, saying he appreciates Treasury's "willingness to adjust to the current situation in our financial markets," while pointing out Paulson's initial unwillingness to consider alternatives to asset buybacks. Dodd says he is "gratified that they listened to Congress when we insisted on including alternative strategies, such as liquidity injections, in the financial rescue legislation."

In the House, Financial Services Committee Chairman Barney Frank, D-Mass., says he's "very disappointed" by Paulson's decision to abandon the original intent of the bailout. Frank told the Boston Herald that Congress should pressure Paulson to forge ahead with buying bad assets.

Sen. Charles Schumer, D-N.Y., made it clear lawmakers increasingly wonder whether Paulson knows what he's doing. Schumer praised Paulson for dumping the asset purchase program but criticized him for not doing more to force banks to use capital injections to boost lending. Schumer also led a protest of Paulson's willingness to rewrite tax law to speed mergers without consulting Congress. In late September, the Internal Revenue Service, at Treasury's direction, allowed acquiring banks to more easily deduct from their taxes past losses booked by their targets.

The change caught Congress by surprise and though the IRS insists the modification had been in the works for weeks, the agency appears not to have issued any notice that it was contemplating it. The tax break was especially beneficial in convincing Wells Fargo to offer a bid for Wachovia that was superior to Citi's. Law firm Jones Day estimates that the tax break was worth $25 billion to Wells, $5.1 billion to PNC Financial Services Group Inc. in its $5.8 billion acquisition of National City Corp. and $2 billion for Banco Santander SA's $1.9 billion purchase of Sovereign Bancorp Inc. In total, Jones Day figures bank acquirers could deduct up to $140 billion because of the change.

Douglas doubts Congress will force the IRS to eliminate the tax break, which in the long run doesn't cost the government much -- it permits acquirers to accelerate tax deductions but doesn't create a new one.

Noting that some have questioned whether Schumer is raising a stink because the change helped Wells steal Wachovia from Citi, he said the value to buyers is "really just a timing issue."

Douglas does say that complaints point to a larger concern about the transparency of Treasury's actions. Individuals and institutions want to understand the ground rules, he says.

Meanwhile, uncertainty will only get worse if the bailout extends to automakers, as many in Congress want. Schumer and Frank say they want money for car companies but insist on restrictions on its use should accompany it. Both insist participants should not use the money for bonuses and dividends. Frank is drafting legislation that would allocate $25 billion from the $700 billion package to aid automakers that will include those restrictions.

Schumer, chairman of the Joint Economic Committee, also said he worries that much of the money is being used to pay for acquisitions instead of inducing the banks to lend more money.

Calls for a new general stimulus bill seem to have lost ground to the auto industry package, which Congress is expected to take up in a four-day lame-duck session this week. A general stimulus package may have to wait until Obama takes office, although House Speaker Nancy Pelosi, D-Calif., and Senate Majority Leader Harry Reid, D-Nev., have urged Congress to take action on the stimulus package this week.

Douglas says aiding a struggling industry with problems that go far beyond lack of credit will have a cascading effect. "Once we start down this slippery slope it will be hard to stop," he says. "If you help automakers, then their suppliers will be next in line and then the heavy equipment manufacturers. What about Boeing and the airlines?"

Douglas doubts the Obama administration will undo much, if any, of Paulson's actions. But one advantage the new team will enjoy from Paulson's shifts is freedom to try something of its own, if necessary. New steps could include more pressure on banks to increase lending or imposing more aggressive mortgage modification programs.

Dodd has said a foreclosure prevention program will likely be on January's agenda. "It is becoming increasingly apparent that a robust and aggressive program to stem the tide of foreclosures ... is critical," he said. "I am concerned that we may have to wait until the next administration."

That attitude suggests an Obama White House and Congress won't feel hamstrung by Paulson's actions, Douglas says. "They can argue that they didn't create the situation and could lay out their own approach before a supportive Congress."