Crisis Prompts Calls for Federal Rescue Entity
Tuesday, September 16, 2008
Key Democratic lawmakers said yesterday that the government may need to create a federal entity to manage the assets of insolvent institutions, much as the Resolution Trust Corp. liquidated failed thrifts during the savings-and-loan crisis of the 1980s.
Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, said he sees a growing recognition among economists and even some conservative market observers that further federal intervention may be needed to stabilize markets roiled by waves of foreclosures, plummeting home prices, paralyzed credit markets and a crisis of confidence in some of Wall Street's largest players.
Speaking to reporters late yesterday, Frank said lawmakers needed to decide whether the market has "gotten into such terrible shape that specific interventions haven't helped. Are we at the point where there needs to be some federal intervention?"
"I think that's probably the next question we'll have to debate," Frank said, referring to the possibility of an entity similar to the Resolution Trust Corp. "The president-elect may be asking us to take a look at this."
Frank said the assets of many troubled financial institutions are "probably undervalued by the panic," suggesting that the federal government could "hold them" without saddling taxpayers with excessive costs.
Sen. Jack Reed (D-R.I.), an influential member of the Senate Banking Committee, echoed Frank's remarks, saying a move to create a new Resolution Trust Corp. would have to originate with the White House, the Federal Reserve Board and other bank regulators.
Reed noted that the government committed $29 billion to help J.P. Morgan Chase absorb Bear Stearns, but did not step in to help salvage Lehman Brothers.
"The question has to be asked, are you going to do it systematically and generalize it?" Reed said. "If there are another couple shocks, when does the system start shutting down?"
Frank and Reed spoke during a day of nervous silence on Capitol Hill, as many lawmakers either held their tongues or issued cautious statements to avoid provoking further panic in the markets following the failure of Lehman Brothers and the sale of Merrill Lynch.
One of the most important players on financial issues -- Sen. Christopher J. Dodd (D-Conn.), chairman of the Banking Committee -- gave no interviews and made no public statements until day's end, after the markets had closed. At the request of Treasury Secretary Henry M. Paulson Jr., Dodd also canceled a hearing scheduled for today at which Paulson was to have testified about his takeover one week ago of mortgage finance giants Fannie Mae and Freddie Mac.
Key Republicans, meanwhile, promised a thorough examination of how Lehman Brothers wound up in bankruptcy and Merrill disappeared in a sale to Bank of America. That examination "should focus on excessive leveraging, the over-extension of credit, the failure of regulators to limit these risky practices, and the complete failure of rating agencies to accurately assess risk," Rep. Spencer Bachus (R-Ala.), the senior Republican on the House Financial Services Committee, said in a written statement.
But that will come later. For now, the statement said, "we all need to work together to restore stability to the markets and to support our economy."