Treasury Secretary Henry Paulson on Wednesday delivered his first 30-day update on the $700 billion rescue package of the financial system. So how is it doing?

Of the first $350 billion, $290 billion has gone to buying stock in more than 50 of the nation's major banks. This injection of cash has, in Paulson's words, "strengthened balance sheets of a broad array of healthy banks" so they can get on with normal lending.

That step, he notes, has "clearly helped stabilize our financial system." And when the economy improves, the Treasury will be able to sell those stocks and recoup taxpayer funds. All of which is fine.

Two other steps, though, are not so fine.

n Paulson wants to use the remaining $60 billion of the first $350 billion to inject cash into non-bank credit card and auto loan firms. This is an irredeemably bad idea. The problem is not that consumers don't have access to credit cards or can't get an auto loan. It's that no one wants to buy. Giving money to companies such as American Express is not going to change that. Congress should stop this idea before it goes any further.

n Fed officials announced that they will dump more money into failing insurer American International Group. This marks a major shift in policy away from investing in healthy banks.

The Fed claims that this is a one-time event. But it sets a bad precedent, increasing pressure to save other dying companies. The auto industry, for example, already is lining up.

Despite a record Fed loan of $85 billion in mid-September and an additional $38 billion in October, AIG keeps piling up billions in losses. So now the Treasury will replace the entire previous package with a larger $152.5 billion bailout.

It will cut AIG's original loan to $60 billion with a lower interest rate. The government will buy $40 billion in stock.

And the government will buy $52.5 billion of mortgage-related securities that AIG can't sell. As foreclosures have mounted, the market value of these securities has dropped sharply. The government will pay a "fair value" price, not the current fire sale price, which means the government may not recover what it spends.

The only good thing to come out of the AIG mess is that Paulson is backing off the idea of having the Treasury buy up troubled mortgage-backed securities held by banks. Whew.

Paulson understands that, as he puts it, "market turmoil will not abate" until the housing market itself is addressed. The real issue, as Federal Reserve Chairman Ben Bernanke has said, is that the economy will recover only when we end the spiral of foreclosures that is pulling down the entire financial system.

To that end, Paulson touted the FDIC model of loan modifications set up after the federal takeover of California-based IndyMac Bank. That model requires lenders and loan servicers to apply belatedly the sound underwriting standards that brokers and lenders failed to apply when they made the loans in the first place — assuring that borrowers' monthly payments for principal, interest, taxes and insurance equal no more than 38 percent of household income.

Maximizing loan modifications, Paulson said, is a "key part of working through the housing correction." He and the Treasury Department should get moving on it. And with California at ground zero of the foreclosure crisis, Speaker Nancy Pelosi and other members of the state's House and Senate delegations should be paying very close attention.