Bush urges bailout unity

President says economy is in danger, warns of risk of a long recession

A graph shows levels of market strain, with a significant spike in the last week, during a hearing in Washington, D.C., yesterday. (Brendan Hoffman/ Getty Images)

WASHINGTON - President Bush, bluntly warning that "our economy is in danger," urged Congress to pass a sweeping $700 billion financial rescue package in order to avert "a long and painful recession."

While Bush's remarks were addressed to the American people, his immediate target was 435 US representatives and 100 senators, including many members of his own party who have responded with skepticism or outright anger to his call for what many have called a massive bailout of Wall Street. A vote could come within days.

Bush, a staunch believer in free markets, acknowledged that he was going against his own philosophy in urging a massive government intervention in the financial industry. But he said the situation had grown so dire, and the banking regulations so outdated, that he had no choice.

"The market is not functioning properly," the president said. "There has been a widespread loss of confidence, and major sectors of America's financial system are at risk of shutting down."

Shortly before delivering the speech, Bush took the extraordinary step of inviting the presidential candidates, Republican John McCain and Democrat Barack Obama, to attend a White House meeting today to help hammer out an agreement with congressional leaders. The two aspirants for Bush's job accepted the offer, setting the stage for a historic session that could determine the fate of the package - and the state of the economy that one of the two candidates will inherit after the election.

"Now is a time to come together - Democrats and Republicans - in a spirit of cooperation for the sake of the American people," Obama and McCain said in a joint statement last night. "The plan that has been submitted to Congress by the Bush administration is flawed, but the effort to protect the American economy must not fail."

At closing yesterday, US stocks fell for the third time this week, reflecting anxieties about the bailout plan. The Dow Jones industrial average dropped 29 points, or 0.3 percent, to 10,825.17.

In his speech last night, Bush signaled that he agreed in principle with two of the Democrats' key demands: protecting the taxpayers and ensuring that "failed executives do not receive a windfall from your tax dollars," a reference to complaints about huge executive salaries and generous, multimillion-dollar severance packages. But he did not outline any specifics.

Although Democrats and some Republicans have blamed Bush's policies in part for the crisis, the president said the problems developed "over a long period of time," fueled by huge amounts of money made available to home-loan borrowers without the means to pay fast-increasing interest rates.

Bush's speech came at a pivotal moment in the negotiations over the package.

The president's original, three-page proposal - which gave Treasury Secretary Henry M. Paulson extraordinary power to buy up to $700 billion in bad mortgage-related debt from distressed Wall Street firms without review - appeared to have no chance of passage. With Democrats in control of Congress, and many conservative Republicans openly skeptical of the plan, the administration worked feverishly yesterday cutting deals with Democratic leaders, hoping to get a bill to the president's desk within days.

Senate Banking Committee chairman Christopher Dodd, Democrat of Connecticut, said after the president's speech that negotiations were proceeding well. "We are making progress and are committed to sending the president a proposal in an expeditious - but judicious - manner," he said in a statement.

Despite dire warnings that the nation's economy could plummet into chaos unless a "clean" rescue package is approved with a minimum of changes, members of both political parties said Bush's broadly-drawn proposal gives too much help to Wall Street firms that caused the problem with risky investments and not enough help to Main Street businesses and homeowners facing foreclosure.

Bush was a wounded messenger: a Fox News poll showed his approval ratings have plunged to just 26 percent with just over four months left in his term. In addition, some members of Congress have sour memories of Bush pushing them to vote for the Iraq war in 2003 by asserting that Iraq had weapons of mass destruction.

On Capitol Hill earlier yesterday, Paulson tried to assure skeptical members of the House Financial Services Committee. He testified that the massive rescue package would be used to buy up and resell battered mortgage-backed securities, and that the sale of the assets could recoup much of the expense.

"Depending on the rate at which our housing market and economy recover, the loss to the taxpayers should be minimal," Paulson said. "And a number of experts believe the government should actually break even on this program."

In a significant concession, Paulson backed Democrats' general concept of curtailing the severance packages and paychecks of corporate executives whose companies are rescued with taxpayer money.

"The American people are angry about executive compensation, and rightfully so," Paulson testified. "Many of you cite this as a serious problem, and I agree." He did not specify how he felt the problem should be resolved.

The Bush administration and Democratic leaders also agreed in principle to an oversight board that will monitor how the Treasury Department deals with the assets, addressing concerns that Paulson's power would have been unchecked. On another key issue, the White House agreed that the government should put pressure on lenders to renegotiate loans that otherwise would go into foreclosure.

But a Democratic proposal to empower bankruptcy judges to rewrite some mortgage terms - an idea the White House and the banking industry oppose - had stalled as of last night, congressional officials said. Obama strongly signaled that Democrats would drop the effort to include the bankruptcy provision, saying at his press conference yesterday that the proposal "is probably something that we shouldn't try to do in this piece of legislation."

That left a major sticking in the negotiations: whether taxpayers should get some kind of ownership stake in the companies that sell their bad debt to the government, a proposition intended to ensure a return for the money. But many Republicans argued it would drive away some firms that might need to participate in the program.

Paulson skirted the issue in his testimony. He told House members that both Republicans and Democrats insist "that the taxpayer should share in the benefits of this plan" to rescue Wall Street. The entire proposal, he said, "is about benefiting the American people" by stabilizing the nation's faltering economy.

Earlier yesterday, Representative Stephen Lynch, a Massachusetts Democrat and member of the House Financial Services Committee, said in an interview that most members would vote for the package "if they think it will help."

"I don't think anybody is going to vote based on what McCain and Obama do," Lynch said. "We can't play political ping pong here. This is serious."

Representative Deborah Pryce, an Ohio Republican, urged Paulson and Federal Reserve Board Chairman Ben S. Bernanke to do a better job of explaining to taxpayers why the rescue package is needed.

"Our jobs as representatives is to do the people's will, and so far you're a far cry from having the people on your side," Pryce said. "We can't say to them, 'Trust me, trust the Fed, trust the Treasury,' because they already feel that trust has been breached."