A back-and-forth over bailout

Democrats insisting on major changes

Senate Banking Committee chairman Christopher Dodd (left) and Senator Charles Schumer caught the spotlight after meeting about the government economic rescue plan on Capitol Hill. (Kevin Lamarque/ Reuters)

WASHINGTON - Democrats on Capitol Hill yesterday called for major revisions in the broad, $700 billion bailout plans for Wall Street financial firms, seeking tighter restrictions on executive pay, increased regulation of financial dealings, and help for homeowners facing foreclosure.

While the Bush administration presented a plan that gave sweeping powers to engineer the largest financial rescue in US history and urged Congress to pass it by week's end, Democrats rushed to fill in what they called gaps in the proposal. That increased the possibility that Congress would not enact the bailout plan as quickly as the president and Treasury Secretary Henry Paulson would like.

The White House, which rolled out the plan on Sunday, signaled it would agree to greater oversight of financial companies and agreed to put pressure on banks to renegotiate with homeowners on defaulted loans. But congressional officials said the Bush administration balked at another key Democratic proposal: granting bankruptcy judges the power to restructure mortgage terms to keep at-risk homeowners out of foreclosure.

Wall Street investors reacted with deep anxiety about what the final bailout package might look like, which helped send the Dow Jones industrial average down 372 points, or 3.3 percent, to close at 11,015.69. The news from Washington also had a ripple effect worldwide: The value of the dollar had its sharpest drop against the euro since the introduction of the currency in 1999, and oil recorded its biggest one-day jump on the New York Mercantile Exchange.

Earlier in the day, President Bush urged Congress to act immediately on his proposal, without add-ons or restrictions. Lawmakers are slated to adjourn Friday, with many members anxious to head to their home districts for the end of the campaign season. Both the House and the Senate must approve the package by then and send the bill to Bush's desk for his signature.

"The whole world is watching to see if we can act quickly to shore up our markets and prevent damage to our capital markets, businesses, our housing sector, and retirement accounts," Bush said. Though he acknowledged that the Democratic-controlled Congress will want to amend the package, he warned them against doing anything that would "undermine the effectiveness of the plan."

But House Financial Services Committee chairman Barney Frank, a Massachusetts Democrat, said at a news conference yesterday that it was essential that the bailout package included some mechanisms to help homeowners caught in the mortgage squeeze. He said taxpayers also should get a stake in the financial companies the government will buy, guaranteeing them at least some repayment if the companies are resold at a profit.

"We understand that bad market choices have put us in a situation where something has to happen," Frank said. "We want it to happen with the best possible chance of it working and with the taxpayers ultimately being made whole."

Frank and his Senate counterpart, Banking Committee chairman Christopher Dodd of Connecticut, provided the Democrats' main response to the president's plan, as Bush administration officials, including Paulson, are slated to come to Capitol Hill starting today to testify. The two chairmen put forth fairly similar proposals, and many other Democrats are expected to weigh in with legislation today.

Despite strong opposition from the banking industry, Democrats insisted on granting bankruptcy judges the power to restructure bad home loans or adjust monthly payments as a way to keep people in their homes. And lawmakers included provisions to cap CEO severance payments, mindful that chief executives of failed mortgage companies Fannie Mae and Freddie Mac were in line to get severance packages worth tens of millions of dollars.

One of the most far-reaching proposals by the Democrats was to give the government an equity stake in the distressed companies, an idea spelled out in legislation Dodd proposed.

In a sign of possible trouble for the administration, one of the most influential House Democrats yesterday said he has "serious reservations" about the plan. Henry Waxman, chairman of the House Committee on Oversight and Government Reform, said that "the structure of the plan appears designed to maximize returns for Wall Street and minimize protections for the taxpayer."

Waxman called for a limit of $2 million in annual pay for executives of companies that benefit from the rescue plan, while seeking more government oversight of the troubled firms. Urging that alternative rescue plans be studied, Waxman said: "We should not be stampeded into enacting a flawed proposal at huge costs to the taxpayer."

Former Clinton administration labor secretary Robert Reich, who is advising Democrats, said in an interview yesterday that the proposal is designed to recoup some of the hundreds of billions of dollars being spent on the rescue package.

"If the value of the company increases and when profitability returns, taxpayers can get something back from the risk they have taken on," Reich said. "Shareholders and executives of these institutions need to be held accountable."

On the presidential campaign trail, both John McCain and Barack Obama agreed that Congress must act swiftly, and that Bush's plan must be modified to include checks and balances.

McCain, the Republican presidential nominee, said he is "greatly concerned" that Paulson would get "the unprecedented power to spend $1 trillion without any meaningful accountability" if Congress approved the package as is.

Obama, McCain's Democratic rival, said the plan has to include stricter oversight of Wall Street and ways that homeowners can stave off foreclosure. "We've got to have relief for the homeowners," Obama said.

In Congress yesterday, Senate minority leader Mitch McConnell, a Kentucky Republican, appearing sensitive to charges that the measure was a widely unpopular bailout of Wall Street, tried to shape his party's message by recasting the proposal as a "Main Street Rescue Plan." Acknowledging that the GOP has "many serious questions," he said the plan would give Americans "the security of knowing that the problems on Wall Street are not going to spread to Main Street."

Though many Republicans closed ranks around the president's plan, some in the GOP expressed reservations about adopting a sweeping, costly package that goes against such party principles as deregulation, deficit spending, and opposition to government bailouts.

"Congress must not hastily embrace a cure that may do more harm to our economy than the disease of bad debt," Representative Mike Pence of Indiana said.

Taxpayer watchdog groups, which typically work to shine a light on federal projects in the hundreds of millions of dollars, yesterday expressed alarm that Congress could rush the financial package into law within days, saddling future generations with an enormous financial burden. The Bush plan would cost an estimated $700 billion, on top of other obligations, including the rescues of Fannie Mae and Freddie Mac, that could cost another estimated $300 billion.

For comparison, if Congress eliminated every federal earmark - a hot-button issue in the presidential campaign - from every spending bill, the savings would add up to just $18.3 billion, according to Steve Ellis, president of Taxpayers for Common Sense.

"Everybody today is trying to pick their collective jaw off the floor," Ellis said, urging Congress to take the time to study the proposal and "figure out what strings need to be attached."

Estimates of the bailout programs varied greatly. Frank said the proposal could end up costing much less than the administration's estimate of $700 billion if the government gets a decent return on its investment in distressed financial instruments.

"We're acquiring things that we will sell," Frank said. "Nobody knows how much they will cost in the end. If the market recovers, to a great extent the assets recover. You get more money back."