Bush Seeks $700 Billion for Wall Street Bailout

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Bush Seeks $700 Billion for Wall Street Bailout
by Free Internet Press
9/20/08

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The Bush administration Saturday sent lawmakers a historic $700 billion emergency rescue plan that allows the Treasury to buy the troubled mortgage securities that have been toppling major financial firms and are at the heart of Wall Street's turmoil.

The package, the most sweeping government intervention in the markets since the Great Depression, was $200 billion higher than lawmakers had been told Friday to expect. It also does not include the $200 billion that officials said earlier this month the government will spend on the rescue of Fannie Mae and Freddie Mac.

To accommodate the spending, the package also would also raise the federal debt limit to $11.3 trillion from the current $10.6 trillion. The debt now stands at $9.6 trillion.

President Bush, speaking to reporters Saturday during a White House appearance with Colombia President Alvaro Uribe, said drastic action was needed because of the scope of the financial crisis.

"It is a big package because it's a big problem," said Bush. "The risk of doing nothing far outweighs the risk of the package."

Bush said that in talks with congressional leaders he "found a common understanding of how severe the problem is" and the need for urgent action.

"We need to get this done quickly, and the cleaner the better,'' he said.

Bush, who campaigned for office as the nation's first MBA president and a free-market advocate, also appeared to address complaints from conservatives that the plan is too costly and inserts the government too heavily into the economy. He suggested he was persuaded by Paulson and other senior aides of the need for drastic intervention.

"I'm sure there are some of my friends out there that are saying, 'I thought this guy was a market guy, what happened to him?' '' said Bush. "My first instinct was to let the market work, until I realized, while being briefed by the experts, how significant this problem became.''

Bush acknowledged that the plans would put "hundreds of billions of dollars at risk," but said he was confident would get most of their money back in the end.

Under the proposed plan, the government would purchase only mortgage-backed securities from troubled firms and only those issued before Friday. The government authority would expire in two years.

The Treasury secretary would be required to report to Congress on the plan within three months.

The plan would allow the government rather than the cold judgment of the marketplace decide the winners and losers from the crisis that has shaken the U.S. economy for the past year.

Millions of Americans could also benefit from other dramatic stopgap measures. Regulators announced efforts to stabilize the mortgage market; curb stock speculation; and insure money-market mutual funds with government money, seeking to protect ordinary investors and preserve a vital source of corporate finance.

The initiatives were precipitated in part by concern that scared investors would race to withdraw their holdings from money-market funds, which hold $3.5 trillion in investments, depleting a major source of short-term funding for corporations.

Bush, who had remained largely silent as the crisis broadened this week, said yesterday it is a "pivotal moment for America's economy." In a Rose Garden speech remarkable for its grim language and ominous tone, Bush said: "This action does entail risk. But we expect that this money will eventually be paid back. ... The risk of not acting would be far higher."

Treasury Secretary Henry M. Paulson, Jr., acknowledged Friday that the federal government's previous policy of addressing corporate failures on a case-by-case basis had not stemmed the accelerating crisis. He said the new comprehensive strategy has a better chance of calming the turmoil that froze critical segments of the credit markets and sent stock markets into a tailspin earlier this week.

"I am convinced that this bold approach will cost American families far less than the alternative - a continuing series of financial institution failures and frozen credit markets," Paulson said in a speech at the Treasury Department.

The Bush administration, Federal Reserve Chairman Ben S. Bernanke and congressional allies launched a major offensive yesterday to persuade lawmakers to support Paulson's proposal. Because the plan needs the approval of Congress, officials from the Treasury and the Fed are worried that delay by lawmakers would spark fresh anxiety in the markets. They are working with congressional leaders to pass the plan by the end of next week, which would be extraordinarily quick for Capitol Hill.

"I am very optimistic that we can pass a balanced and comprehensive plan within a week," said Sen. Charles E. Schumer (D-New York), who chairs the Joint Economic Committee. "Chairman Bernanke made all too clear the cost of inaction."

Some lawmakers, including Sen. Richard C. Shelby (Alabama), the ranking Republican on the Senate Banking Committee, have expressed concerns about the plan's cost, chance of success and possible unintended consequences. Such opposition could delay passage. "We are being asked to go 'all in' with taxpayer dollars, and once our government and the taxpayer is on the hook, there is no fallback option," said Rep. Jeb Hensarling (R-Texas), a leading conservative. "At the moment I remain skeptical, fearful and unconvinced that this is the proper remedy for our nation."

Paulson and Bernanke held a morning conference call with more than 100 House Republicans, making the case for their plan and describing in "strong and serious" terms the dire situation facing the financial system, according to a participant on the call.

Hours later, the House Republican leadership met with members and lobbyists to warn against cluttering the legislation with amendments or trying to delay its passage. The message, according to a person at the meeting: We want a clean bill.

The Dow Jones industrial average, which jumped between massive losses and gains this week, rose 3.3 percent yesterday to close at 11,388.44. Combined with a 410-point gain Thursday, the index ended near break-even for the week -- sweeping away Monday's 504-point loss. The Standard & Poor's 500-stock index, a broader measure, rose 4 percent yesterday and actually posted a gain for the week.

"It's a massive relief rally on the back of the comprehensive plan," said Joseph Brusuelas, chief economist for Merk Investment. "If you have hundreds of millions of mortgage-backed securities on your books that you cannot value, much less sell, you can now unload them to the U.S. government."

Investors also moved out of the safety of Treasury and back into the broader market. On the expectation that the economy will now recover, the price of light, sweet crude oil jumped $6.67, to $104.55 a barrel, on the New York Mercantile Exchange.

The proposals unveiled yesterday capped a dizzying two weeks in which the government seized the mortgage-finance giants Fannie Mae and Freddie Mac; allowed the 158-year-old Lehman Brothers to collapse; and taken over American International Group, the largest insurer in the world.

In his speech yesterday, Paulson identified the mortgage securities that the government would buy as the "underlying weakness in our financial system."

Mortgage securities provide the financing for most home loans sold in the United States and were widely held by big financial firms and banks. When home values started dropping, traditional buyers of these securities ran for the exits, and the value of the securities also plummeted. Those left holding the bag -- mainly mortgage firms, big Wall Street banks and hedge funds -- started to suffer vast losses, and some collapsed altogether.

Under the administration's plan, the Treasury would offer to buy the troubled mortgages from U.S. financial institutions. The Fed has been talking to its counterparts around the world to set up similar programs for other countries' banks.

The Treasury would hold several rounds of buying, first purchasing securities from the banks that request the lowest prices, in order to limit the cost to taxpayers. The plan could be broadened to include securities based on other kinds of loans, such as student loans and commercial real estate.

The U.S. government could end up holding the securities for years or even decades, depending on whether they recover value.

The troubled mortgage securities "are clogging up our financial system and undermining the strength of our otherwise sound financial institutions," Paulson said. "As a result, Americans' personal savings are threatened, and the ability of consumers and businesses to borrow and finance spending, investment and job creation has been disrupted."

Some Democrats said yesterday that they are pushing for the Treasury to help the homeowners whose mortgages the securities finance avoid foreclosure, a debate that is expected to play out next week.

The timing of the administration's plan reflected in part mounting concern about money-market mutual funds, which were widely regarded as safe havens until the bankruptcy of Lehman Brothers caused a major fund to post a loss this week. Officials feared a massive run as investors withdrew about $200 billion during the week, including $50 billion on Thursday, according to Crane Data, which tracks the industry.

The problems accelerated as the massive withdrawals forced funds to sell assets at fire-sale prices. The Federal Reserve, trying to stanch the bleeding, said it would offer funding for banks to buy assets from the funds at normal prices.

The Treasury Department also announced that it would offer an insurance program for the funds that is similar to the long-standing government guarantee of bank deposits. Funds would pay a fee in exchange; if they collapse, the government repays investors.

Yet the Treasury intervention threatens to drain deposits from already troubled banks because money-market funds offer higher interest rates and now will feature the same federal protection. People familiar with the matter said banking regulators were not consulted on the plan and were considering how best to limit the impact on banks.

The American Bankers Association released a letter to Bernanke and Paulson that said the government had acted in "great haste" and should reconsider.

"The program announced this morning runs the risk in the long run of profoundly changing the nature of our financial system and, specifically, undermining the nation's banking system," wrote ABA President Edward Yingling.

The Treasury further announced that Fannie Mae and Freddie Mac will increase their purchases of mortgage-backed securities. By buying more of these securities, the two firms will provide more money to fund mortgages and should decrease the interest rate on those mortgages.

The Federal Housing Finance Agency, the regulator overseeing Fannie Mae and Freddie Mac, said it had directed the companies to begin buying more mortgages but declined to say how much more they would buy. Although this could expose the companies to greater risks, FHFA Director Joseph B. Lockhart III said government "examiners will continue to oversee that such activities are done in a safe and sound manner."

Paulson also said the Treasury would expand its plan to buy mortgage-backed securities to supply additional money to Fannie Mae, Freddie Mac and the overall mortgage market. The government plans to buy $10 billion in mortgage securities in the next month, up from $5 billion earlier this year.

Intellpuke: Talk about inflation! When Bush & Co. first announced this bailout two days ago the price tag for taxpayers was $400 billion. By Friday evening it was $500 billion and today (Saturday) it is $700 billion and will bring the national debt to $11.3 trillion. That's a lot of U.S. taxpayers' money being poured into this crap shoot and, worse, it is betting on the come -- namely, that there will be profit returned on this bailout, which is dubious at best. I hope the American people's representatives in Congress study this bailout plan thoroughly and do not -- as they did with Patriot Acts I and II, the creation of the Homeland Security Dept., and warrantless wiretapping of American citizens -- pass this sucker without even reading it. The prevailing theory here seems to be that it's okay to bankrupt America, just don't let the big special interests on Wall Street go bankrupt. Personally, I think the Bush Administration has its priorities backwards.

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Bush Urges Democrats to Act Quickly on Bailout Plan
by David M. Herszenhorn, Stephen Labaton, Mark Landler and Mr. Labaton
The New York Times
September 23, 2008

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WASHINGTON — As Congressional Democrats began to set terms for a plan to rescue the nation’s financial institutions, President Bush urged them on Monday to move quickly and to resist the temptation to add provisions that, he said, “would undermine the effectiveness of the plan.”

Democrats said on Sunday that they believe the $700 billion bailout package must include greater legislative oversight of the Treasury Department, more direct assistance for homeowners and limits on the pay of top executives whose firms seek help.

Mr. Bush’s statement, issued early on Monday, did not address any of those specifics, but sought to convey a sense of urgency, saying that a failure to act quickly and to maintain focus on the immediate challenge would not only have consequences for Wall Street; “it would threaten small business owners and homeowners on Main Street.”

Treasury Secretary Henry M. Paulson Jr. appeared on a number of the Sunday talk shows to promote the package. “I hate the fact that we have to do it, but it’s better than the alternative,” Mr. Paulson said on “Fox News Sunday.”

Mr. Paulson urged Congress to approve a “clean” rescue plan without tacking on extra programs, and Mr. Bush sought to underline that point.

“Obviously, there will be differences over some details, and we will have to work through them,” Mr. Bush said. “It is not easy to write a bill of this magnitude in a timely manner.” But he added: “It would not be understandable if members of Congress sought to use this emergency legislation to pass unrelated provisions, or to insist on provisions that would undermine the effectiveness of the plan. I appreciate members of Congress in both parties resisting the urge to do so.”

Amid continuing concerns over the deep global ramifications of the crisis, the finance ministers and central bank governors of the Group of Seven major industrial nations said on Monday that they were maintaining “heightened close cooperation.” In a joint statement released by the United States Treasury on Monday, they pledged to take “whatever actions may be necessary, individually and collectively, to ensure the stability of the international financial system.”

The ministers and governors welcomed the “extraordinary” actions proposed by American officials to take illiquid assets off bank balance sheets, Reuters reported. But the statement made no other mention of any specific steps to be taken by the group’s member nations.

The Bush administration’s proposal could prove to be the largest government bailout of private industry in the nation’s history. It calls for nearly unfettered powers for the Treasury secretary in managing the bailout.

Though the jittery state of the financial markets put pressure on officials and legislators to move quickly, some lawmakers said they did not want to be rushed into approving extraordinary new powers for the Treasury secretary and the government without full consideration of the consequences.

Both presidential nominees, who face the prospect of inheriting an enormous program, said there had to be more oversight of the Treasury Department than the Bush administration had proposed.

Financial companies were already lobbying to broaden the plan. And the Bush administration did indeed widen the scope by allowing the government to buy out assets other than mortgage-related securities as well as making foreign companies eligible for government assistance.

Banks and traders also braced themselves for another tumultuous week in the markets. But early signs indicate that investors in Asia were reacting positively to the developments in Washington. Meanwhile, top Democrats and Republicans on Capitol Hill said on Sunday that they would act swiftly on the administration’s request, but not without setting their own conditions.

“Congress will respond to the financial markets crisis by taking action this week in a bipartisan manner that will protect the taxpayers’ interests,” House Speaker Nancy Pelosi said. She added that the administration’s proposal did “not include the necessary safeguards. Democrats believe a responsible solution should include independent oversight, protections for homeowners and constraints on excessive executive compensation.”

“We will not simply hand over a $700 billion blank check to Wall Street and hope for a better outcome,” she said.

Congressional Republicans, too, put the Bush administration on notice that they would not rubber-stamp the bailout proposal but would insist on a number of changes, including specific protections for taxpayers. Those would include a requirement that any profits from the program be returned to the Treasury.

Aides to senior House Republicans said that lawmakers would also demand greater oversight of the program and were proposing a joint select committee, consisting of members of both parties and both chambers of Congress.

Top administration officials and senior lawmakers said that the markets could be devastated if Congress and the administration failed to reach agreement on the plan.

On Sunday, Mr. Paulson defended the plan and the administration’s decision to expand it to protect foreign companies and authorize even wider latitude to buy assets other than those that were backed by mortgages.

Mr. Paulson, a former Wall Street deal maker, also suggested that the administration would have some flexibility in dealing with concerns raised by Congress.

Democrats said the plan would need to provide more specific relief for troubled homeowners. They said the program, which the administration proposed to be run by Treasury, would have to be more accountable to Congress. And they said that the plan must restrict the compensation of corporate executives from companies that make use of the program to sell the burdensome securities on their balance sheets to the United States.

“We need to offer some assurance to the American taxpayer that Congress is watching,” Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the banking committee, told reporters on Sunday. “One of the things that got us into this mess was the lack of accountability and the lack of oversight that was occurring, and I don’t think we want to repeat those mistakes with a program of this magnitude.”

Mr. Paulson said he hoped that the government would recoup much of the cost of buying distressed mortgage-related assets. But he did not rule out that the initial cost of the bailout could rise beyond $700 billion, the limit set in the terse proposal sent by the Treasury to Congress on Saturday.

“That doesn’t mean we’ll go all the way there, or it doesn’t mean it will stop there and we won’t ask for more,” Mr. Paulson said on the CBS program “Face the Nation.” “What we need is something that is big enough to get the job done. We’ll ask for what we think is a right amount to give us plenty of flexibility.”

Representative Barney Frank, the chairman of the House Financial Services Committee, put forward the Democrats’ proposed changes to the administration’s plan. They would give the Treasury secretary the authority to set “appropriate standards” for compensation of senior executives whose companies sell troubled assets to the government.

Under a so-called claw-back provision, the secretary would have the power to force companies to recoup previous payments to executives of companies involved in the program. And Mr. Frank’s plan would give broad authority for the Government Accountability Office, an investigative arm of Congress, to audit and oversee the program.

But Mr. Paulson said that he was concerned that imposing limits on the compensation of executives could discourage companies from participating in the program.

“If we design it so it’s punitive and so institutions aren’t going to participate, this won’t work the way we need it to work,” Mr. Paulson said on “Fox News Sunday.” “Let’s talk about executive salaries. There have been excesses there. I agree with the American people. Pay should be for performance, not for failure.”

But he quickly added: “But we need this system to work, and so we — the reforms need to come afterwards.”

Republicans, though troubled by some of the same issues as Democrats, seemed ready to give Mr. Paulson wide latitude.

Representative John A. Boehner of Ohio, the House Republican leader, said on ABC: “We don’t need 535 members of Congress adding their best idea. We need to keep it clean, simple, move it through the House and Senate, and get it on the president’s desk.”

Even as Ms. Pelosi and other Congressional leaders were pledging to act swiftly and said a deal was probable by the end of the week, some lawmakers said they would not be rushed into approving a plan.

“I realize there is considerable pressure for the Congress to adjourn by the end of next week,” Senator Arlen Specter, Republican of Pennsylvania, wrote in a letter to the Senate leaders of both parties. “But I think we must take the necessary time to conduct hearings, analyze the administration’s proposed legislation, and demonstrate to the American people that any response is thoughtful, thoroughly considered and appropriate.”

Mr. Dodd said he expected that Treasury would not be particularly interested in any of the Democratic proposals. But he said he had already warned Mr. Paulson to keep an open mind.

“I suggested strongly to him that he leave this door open, or he is going to find himself facing some significant problems,” Mr. Dodd said at a briefing with reporters on Sunday at the Capitol. Mr. Dodd, who met with several of his Democratic colleagues, said that reaching a deal could keep Congress in session past this week, when leaders had hoped to adjourn for the fall elections. “This is of such import that if it takes a little longer to get it right, so be it,” he said.

As they plotted an endgame, Democrats said they planned to consider the bailout proposal separately from an economic recovery program that would include new public works spending, aid to states and added unemployment and food-stamp benefits. Congress could consider that plan and a stop-gap funding plan for the federal government before taking up the Treasury proposal later in the week.

While House Democrats were the first to propose additional legislative language, Senate Democrats were working aggressively behind the scenes on several provisions that could set off debate among lawmakers and aggressive lobbying by an array of interest groups.

Senator Jack Reed, Democrat of Rhode Island, has proposed a provision that would grant the government warrants to purchase stock in companies that participate in the bailout plan, so that taxpayers might be able to profit should the firms flourish after selling their bad debts to the government.

Several Democratic senators are interested in reviving a provision that was knocked out of legislation last summer to grant bankruptcy judges the authority to modify the terms of mortgages for primary residences. That provision is opposed by the banking, lending and securities industries. But supporters say it would guarantee that lenders enter negotiations to modify loans to struggling homeowners.

Carl Hulse and Brian Knowlton contributed reporting.

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Paulson Urges Swift Approval of Bailout Legislation
by Zachary A. Goldfarb
Washington Post Staff Writer
September 21, 2008; 1:05 PM

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Treasury Secretary Henry M. Paulson Jr. today defended the escalating price tag of his plan to rescue the financial markets, saying it is unlikely that taxpayers will end up paying the full $700 billion the Bush administration is requesting to buy the troubled mortgage assets of crippled financial firms.

Paulson appeared on four Sunday news talk shows to urge Congress to pass legislation immediately authorizing the Treasury to act on its plan. He rejected comparisons of the plan to government spending on the Iraq war or massive programs such as Social Security and Medicare.

"This is not traditional spending. This is money to purchase illiquid assets. Those assets will be held and will be sold" so the government will recoup some of the costs, Paulson said.

"The cost won't be anything like what is put out to buy these investments," he said.

But Paulson acknowledged he does not know what the cost ultimately will be. "We can't determine what the cost is today," he conceded.

Paulson delivered his plan to Congress yesterday with a price tag $200 billion higher than he had estimated on Friday. Democrats have responded well to the plan, although they said they would propose several provisions that could generate opposition from the Bush administration, such as efforts to help homeowners struggling to pay off their mortgages or limits on executive compensation.

Some Republicans, meanwhile, have raised concerns about the sweeping nature of the government intervention to bail out the private markets.

Paulson urged Congress not to load up the legislation with controversial provisions. "We need this to be clean and quick," he said.

Rep. Barney Frank (D-Mass.), also speaking on the Sunday shows, reiterated concerns that corporate executives not profit from the rescue plan. "We have a difference on what's clean . . . ," he said. "It would be a grave mistake to say that we're going to buy up a bad debt that resulted from the bad decisions of these people and then allow them to get millions of dollars on the way out."

But Sen. Charles Schumer (D-N.Y) acknowledged that time was of the essence and Congress could not pack the this bill with other benefits. "We will not 'Christmas tree' this bill," he said. "The times are too urgent. Everyone has their own desires and needs. It's going to have to wait."

Paulson said without action on the plan this week, the credit crisis could quickly affect average Americans.

Last week, "the capital markets were frozen, we had a situation where American companies weren't able to borrow money," Paulson said. "This could ultimately affect small banks, loans to businesses, loans to farmers, jobs, people's retirement."

Paulson said he has "every confidence that Congress will go along with" the plan.

The plan would also make foreign financial firms eligible to sell their bad assets to the Treasury.

"If a financial institution has business operations in the United States, hires people in the United States, if they are clogged with illiquid assets," Paulson said, "they have the same impact on the American people as any other institution."

Sen. Richard Shelby (R-Ala.), a member of the Senate Banking Committee who has been skeptical of the rescue plan, said the cost of the plan is likely to be $1 trillion.

"We don't know the end game in this," Shelby said. The Treasury and Federal Reserve have "been staggering from crisis to crisis, and they haven't even said today that this will end the crisis."

Paulson said the intervention was "not something we wanted to do." He said that "excesses" in lending and borrowing had built up over much of this decade, starting a "chain reaction" that spread to financial institutions and now is "playing out in the broader economy."

"This is a humbling experience to see so much fragility in our capital markets," he said.

Paulson said the ultimate cost of the plan would depend on the economy.

"The price you will get for those assets will be based upon how the economy does, the pace at which the housing markets recover," he said.

Paulson also defended the administration's decision to bail out Fannie Mae, Freddie Mac and insurance giant American International Group, but not Lehman Brothers.

In the case of AIG, he said, "This is a situation where there are 50 different insurance regulators, very little oversight at the holding company, a hedge fund on top of insurance companies."

Paulson, who is expected to leave office with the Bush administration in January, said a new administration will have the flexibility to change the program.

"What I'm doing is reacting to deal with the situation we see in front of us today and to do so in a way that protects the American people," he said.

"We very much need regulations, new policies. That is going to take some time," he said.

Paulson said the United States is pressing other countries to take similar steps to bail out their troubled financial institutions.

"We are talking very aggressively with other countries around the world and encouraging them to do similar, and I believe a number of them will," he said.

The Treasury would hire professional asset managers to run the program, he explained. He said, as of now, hedge funds wouldn't be eligible to sell their troubled mortgage assets to the government.

Paulson rejected the idea that the administration could have acted sooner.

"I'm not sure what we could have done sooner," he said. It's been a "once-in-a-50-year kind of a situation here. And there is no way that we could have gone to Congress and got the authority to inject capital into the banking system by buying illiquid assets unless there was the clear and urgent and obvious need."

Paulson spoke on NBC's "Meet the Press," ABC's "This Week," "Fox News Sunday" and CBS "Face the Nation."