A tough sell on Capitol Hill

Legislators grill economic leaders on bailout details

WASHINGTON - Facing angry, testy, and skeptical legislators from both parties, the Bush administration's top economic leaders warned yesterday that the nation's economy could face a widespread meltdown unless Congress quickly passes the biggest financial rescue plan in US history.

Treasury Secretary Henry M. Paulson and Federal Reserve Board chairman Ben S. Bernanke, architects of the plan, urged Congress to immediately approve the $700 billion proposal to give Paulson sweeping powers to buy up bad mortgage-related debt from distressed Wall Street firms. Paulson, rejecting critics who say the plan bails out reckless corporations with taxpayer money but won't help homeowners facing foreclosure, argued his plan will shore up an economy on the brink of collapse, staving off a much larger financial catastrophe for the public.

"This is all about the American taxpayer," Paulson testified. "That's all we care about."

Bernanke outlined a bleak economic scenario if Congress fails to act.

"The financial markets are in quite fragile condition and I think absent a plan they will get worse," Bernanke said. Failure to approve the plan, he warned, would result in even more homes in foreclosure, a jump in the unemployment rate, and a decrease in available credit.

But Democrats and some influential Republicans on the committee weren't convinced the plan would work, while other senators blasted the Bush administration for missing the warning signs leading up to the crisis. At the same time, Senator Christopher Dodd, Democrat of Connecticut, the banking committee chairman, rejected pressure to rush the bailout plan through Congress as is - a sign that President Bush may not get a "clean" bill, free of legislative add-ons and conditions, as quickly as he wanted.

"We need to move and move quickly if we can," Dodd said, "but I feel even more strongly that we need to move carefully and prudently and to make sure that what we do is right."

Senator Chuck Schumer, a New York Democrat, said at the hearing that Bernanke had told him privately over the weekend in an effort to win passage of the proposal that the nation's financial arteries are "clogged" and that without immediate action "the patient will surely suffer a heart attack."

Investors nervous about the fate of the bailout helped send the Dow Jones Industrial Average down by 161 points, to close at 10,854 after losing 372 points on Monday. Over two days, the Dow is down 4.7 percent.

Yesterday's hearing was the first chance for Congress to grill Bush administration officials at a public hearing since the bailout plan was announced over the weekend. Officials from Congress and the Bush administration said last night they had many hours of negotiations ahead before a final deal could be reached.

Democrats have asked for several modifications and the White House has signaled it would agree to some of them, including more oversight of Wall Street and pressuring banks to renegotiate home loans. A congressional official briefed on the talks predicted yesterday that Congress would delay their scheduled Friday departure by at least one day in an effort to broker a compromise.

At the hearing yesterday, Republicans on the committee were as harsh as Democrats in criticizing the Bush administration's handling of the financial crisis. Senator Elizabeth Dole of North Carolina, a White House ally, blamed the Bush administration for "astounding" mismanagement and lax oversight of Wall Street. Senator Bob Corker of Tennessee said the administration was like a "deer in the headlights," and coming up with solutions "on the fly."

And Senator Richard Shelby of Alabama - the ranking Republican on the committee - questioned whether the bailout plan is the best available option to deal with the crisis: "We've been given no credible assurances that this plan will work."

While Bernanke and Paulson both acknowledged there are no guarantees, they insisted their plan was the best alternative to avoid a recession.

With the proceedings carried live on nationwide television, members of the committee repeatedly asked why the White House waited so long before revealing the scope of the problem. Paulson said he warned Bush in a meeting around the time he became Treasury secretary in July 2006.

"When I got down here, after about several months on the job, I was shocked, absolutely shocked, to find it wasn't deregulation or too much regulation or too little regulation, it was a just flawed regulatory structure," said Paulson, the former head of Goldman Sachs, one of Wall Street's most powerful investment firms. "It was built for a different model, for a different financial system. The financial system changed. The regulatory system didn't change. And so that clearly has to be corrected."

Paulson was sympathetic to a Democratic proposal that would place a six-figure ceiling on corporate executive salaries, and ban the multimillion-dollar severance packages some CEOs are set to receive even though their companies failed. But the Treasury secretary did not commit to supporting the idea.

"I've heard your comments on executive compensation," Paulson said. "I share your frustrations. I feel those frustrations. Practices throughout America also upset me."

Dodd said later in the hearing that curbs on executive compensation will be part of the final package: "Count on it."

Paulson, however, was skeptical about the Democrats' proposal to give taxpayers an ownership stake in the companies that get government help. The matter is likely to come up as Congress and the White House continue to haggle over what's included in the final bailout package.

Separately, administration officials have said they would put pressure on banks to renegotiate loans, but they continued to oppose a Democratic proposal to give bankruptcy judges authority to modify loan terms.

Many members on the Senate Banking Committee were frustrated that some of the same economic leaders who testified yesterday had, just months earlier, assured them that any problems looming on the Wall Street horizon were being dealt with.

Dole said that she had been rebuffed for years in her effort to gain greater oversight of the quasi-government mortgage companies, Fannie Mae and Freddie Mac, and she had strong doubts about the bailout package.

"I have very strong concerns that this rescue proposal will unfairly hold taxpayers responsible for the costly and reckless decisions of investment bankers on Wall Street," Dole said. "I, like the North Carolinians I am hearing from, am very skeptical of this proposal and frankly, I'm extremely frustrated that we find ourselves in this position."

Dodd also expressed alarm that the Bush administration wanted to give Paulson extraordinary power to implement the plan, without oversight or review.

"It would allow this secretary and his successors to act with utter and absolute impunity, without review by any agency or a court of law," Dodd said. "After reading this proposal, I can only conclude that it is not just our economy that is at risk, but our constitution as well."

The crisis stems from the huge numbers of high-cost sub-prime mortgages that were sold to home buyers who could not afford them. Wall Street firms had bought and bundled housing loans, then created and sold new securities based on the underlying mortgages. The market for selling and swapping those securities, however, was beyond the reach of most federal regulations.

When more and more borrowers defaulted on their mortgages, the system collapsed and the related securities plunged in value, fueling a wider credit crisis. Though the government has asked for $700 million to clean up the mess, analysts said, the true cost could reach $1 trillion or more.

On the campaign trail yesterday, both Barack Obama and John McCain said yesterday there needs to be more oversight of how the bailout works.

Campaigning in Michigan, McCain, the Republican nominee, said the government shouldn't ask "teachers and farmers and small-business owners to fill the gas tanks of the helicopters of Wall Street tycoons." Obama, his Democratic rival, said in Florida that there are reports that "some CEOs may refuse to cooperate with this plan if they have to forgo multimillion-dollar salaries."

In New York, President Bush, said he was confident "there will be a bipartisan bill that the Republicans and Democrats will come together to get this piece of legislation passed."