Rescue plan takes shape on Capitol Hill
Congress begins drafting authority for sweeping U.S. package
By
Greg Robb, MarketWatch
Last update: 1:33 p.m. EDT Sept. 20, 2008
WASHINGTON (MarketWatch) -- U.S. lawmakers began hammering out legislative authority on Saturday for the Bush administration to undertake a sweeping, $700 billion rescue of the American financial system.
Lawmakers and administration officials were expected to work through the weekend to hash out details of a multipart package to revive the financial system and sustain the U.S. economy.
The plan allows the government to buy the bad debt of U.S. financial institutions for the next two years, according to a draft of the proposed legislation. It gives the Treasury secretary the authority to buy $700 billion in mortgage-related assets, in a bid to address the root cause of the turmoil that swept through markets this past week and resulted in the filing for bankruptcy by and government takeovers of some of the biggest U.S. financial companies.
It would raise the statutory limit on the national debt from $10.6 trillion to $11.3 trillion. The proposal does not specify what the government would get in return from financial companies for the federal assistance, according to a copy of the brief draft plan. The administration and Congress are aiming for quick action on the plan as markets remain jittery.
On Saturday, President Bush called the crisis "a pivotal moment for America's economy," in his weekly radio address.
Treasury Secretary Henry Paulson sent the plan to Capitol Hill on Friday night, a Treasury spokesman said. Lawmakers have pledged rapid action. On Friday, some said they were optimistic it would be approved next week. Sen. Charles Schumer, D-N.Y., in a statement released by his office, offered a mixed reaction to the proposal. "This is a good foundation of a plan that can stabilize markets quickly," he said. "But it includes no visible protection for taxpayers or homeowners. We look forward to talking to Treasury to see what, if anything, they have in mind in these two areas."
Republican and Democratic staff from the Senate Banking Committee and the House Financial Services Committee were set to meet with Treasury staff Saturday to discuss the proposal. Democrats on Capitol Hill are expected to demand that the legislation include some of their priorities in return for quick passage of the plan. Analysts said that this would likely include some mechanism to help homeowners refinance mortgages on homes that have dropped sharply in value.
If approved by lawmakers, the plan would give the Treasury secretary broad power to buy and sell the toxic mortgage-related assets without any additional involvement by Congress. The plan would require that the congressional committees for budget, tax and financial services be briefed within three months of the government's first use of the act, and every six months after that, according to reports.
President Bush said the package will be costly but is necessary. The measures being taken by the administration, the Treasury and the Securities Exchange Commission "require us to put a significant amount of taxpayer dollars on the line," Bush said. "But I'm convinced that this bold approach will cost American families far less than the alternative. Further stress on our financial markets would cause massive job losses, devastate retirement accounts, further erode housing values, and dry up new loans for homes, cars, and college tuitions," he said. In the unprecedented action, Paulson has said that he wants to spend "hundreds of billions" of dollars to take unsellable mortgage assets off the balance sheets of financial firms. The hope is that this will unclog the financial system and allow banks to lend funds to each other and clients.
The failure of banks to lend is considered a big risk to the economic outlook. Without access to funds, businesses and consumers will cut back spending. Among the things the government is asking for is the authority to hire asset managers to oversee the buying of assets, the Wall Street Journal reported Saturday on its Web site. The New York Times reported that Federal Reserve chairman Ben Bernanke warned members of Congress of the risk of a deep and extended recession unless action was taken to clear the toxic mortgage assets from bank balance sheets.
Treasury staff and Hill staff will attend meetings Saturday, while Paulson works the phone with individual members. Outside experts said it was crucial to know the price that Treasury would pay for the assets. A deal that is good for banks would be bad for taxpayers, analysts said. A more effective program would also be more costly. Some legislative add-ons may slow the package. Democrats may want to revisit their proposal of earlier this year to give bankruptcy judges power to lower the principal and interest rate of a home mortgage.
At the moment, bankruptcy judges only have this power over vacation homes. The mortgage industry is firmly opposed to this measure. Senate Banking Chairman Christopher Dodd, D-Conn., speaking to reporters Friday, said it is important for the final legislation to deal with the record numbers of foreclosures and not just a bailout of financial firms. "My hope is that this plan will not only allow us to deal with illiquid debt and obligations out there but also focus as well on bringing to a closure the foreclosure problem as well," Dodd said at a press conference.
Greg Robb is a senior reporter for MarketWatch in Washington.
