Paulson seeks quick action on rescues
$700b plan to restore credit market would buy bad loans
WASHINGTON - The Bush administration insisted yesterday that Congress move quickly to approve what one lawmaker called the "mother of all bailouts" - a $700 billion proposal to buy a mountain of bad mortgage debt in an effort to unfreeze the nation's credit markets.
Congressional leaders endorsed the plan's main thrust, saying passage might occur in days. But they said it must be expanded to include help for people on Main Street, as well as for the big Wall Street financial firms that have lost billions of dollars with bad investment decisions.
The proposal "does not include the necessary safeguards," said House Speaker Nancy Pelosi, Democrat of California. She called for "independent oversight, protections for homeowners, and constraints on excessive executive compensation."
Treasury Secretary Henry Paulson stressed that time was critical to get the proposal passed and that changes to the administration's measure, which was sent to lawmakers Saturday, could delay that approval - further unsettling global financial markets, which have seen a number of stomach-churning days as the result of the biggest upheaval on Wall Street since the Great Depression.
The administration, which has been scrambling to deal with the tumult, said late yesterday that it was modifying a program announced just two days earlier to try to bolster the teetering $3 trillion money-market mutual fund industry.
On Friday, the government said it would use a $50 billion Treasury fund to provide government guarantees for money-market mutual fund accounts. However, in a significant revision announced late yesterday, the Treasury Department said it would only guarantee funds that were in the accounts as of Friday.
The guarantees were put in place to stem a wave of withdrawals from mutual fund accounts that had been sparked largely by panicked institutional investors.
But the banking industry complained that the new guarantees ran the risk of sparking withdrawals by their savings depositors who might decide to transfer their bank deposits, which are government-insured, to money-market mutual funds, which often pay more in interest than bank savings accounts but up until Friday had not enjoyed any government guarantees.
The American Bankers Association praised Treasury's about-face. "By limiting this new guarantee to funds that existed on or before last Friday, they have eliminated the incentive for people to move money out of bank accounts to seek a higher government guarantee," ABA president Edward Yingling said.
In another change, Treasury said funds deposited in tax-exempt money-market mutual funds as of Friday would also be covered. Originally, it had said those funds would not be covered because it might jeopardize their tax-exempt status.
In the past two weeks, the government has taken over the country's two biggest mortgage companies, Fannie Mae and Freddie Mac, and its biggest insurance company, American International Group Inc., but stood by while the nation's fourth-largest investment bank, Lehman Brothers, was forced to declare bankruptcy and another investment giant, Merrill Lynch, was forced to sell itself to Bank of America.
Paulson and Federal Reserve chairman Ben Bernanke made the joint decision last week that the only way to stop the carnage was to deal with the root cause of all the troubles, billions of dollars of bad mortgage debt on the books of major financial companies. This debt has triggered the worst credit crisis in decades, causing credit markets to essentially freeze up, despite the fact the Fed joined with major central banks around the world to pump billions of dollars of reserves into the financial system.
The plan the administration has developed with support from the Fed would have the government buy up to $700 billion of the bad loans, taking them off the books of financial firms, with the hope that this will allow those companies to resume normal lending operations.
Senator Richard Shelby of Alabama, the top Republican on the Senate Banking Committee, said the government's efforts would be the "mother of all bailouts" and could cost $1 trillion when the cost of the government takeovers of Fannie, Freddie, and AIG were included.
Paulson, appearing on four of the five Sunday morning talk shows, insisted the administration had no choice.
The cost of doing nothing would have been far more severe because the clogged credit markets would make it harder for businesses to get the loans they need to keep operating, he said. Doing nothing also would make it harder for consumers to get the credit they need for car loans and other purchases, he said.
"We need to look at what is going on in the credit markets and they are still very fragile right now and frozen," Paulson said on "Meet the Press."
Paulson said he was confident that other major countries would take similar actions, helping to avert a global meltdown. He refused to name the countries that he expected would act.
Congressional Democrats said they understood the need for urgency but insisted the measure needed to provide help for people threatened with losing their homes. And some GOP leaders told the White House to prepare to accept more oversight and guarantees the Treasury will recoup some of the bailout money.
Republicans, however, appeared less eager to support several other Democratic proposals. One would change bankruptcy laws to allow for mortgages to be modified, something financial companies have strongly opposed. Another would cap benefit packages for executives at the huge Wall Street firms that will be selling their bad debt to the government.
"It would be a grave mistake to say that we're going to buy up a bad debt that resulted from bad decisions of these people and then allow them to get millions of dollars on the way out," said the House Financial Services chairman, Barney Frank, Democrat of Massachusetts. "The American people don't want that to happen and it shouldn't happen."
Senate Banking Committee chairman Christopher Dodd, a Connecticut Democrat, said he hoped Congress could pass the legislation this week but "if it takes a little longer, then so be it."
He said financial markets should be reassured that Congress was moving toward a significant response and a few more days to "get it right" should not trigger a nosedive on Wall Street.
Republicans warned against too many amendments. "This would be the most serious financial crisis that the world has ever dealt with. It is not a time to be playing games," said House Republican Leader John Boehner.
Cambridge Democrat Michael E. Capuano, a member of the House Financial Services panel, said of the plan: "This is the most socialistic action since the 1930s, and even I have trouble with it." Referring to the Bush administration and its allies, he said, "These people who have been prophets of the free-market system, and they're backpedaling."
Globe staff writer Ross Kerber contributed to this report. 