Lawmakers Seek Market Intervention
Proposals Include Tighter Regulation, Federal Entity to Stabilize Wall St.

By Lori Montgomery
Washington Post Staff Writer
Wednesday, September 17, 2008

Lawmakers from both parties clamored yesterday for fresh government action to stabilize chaotic financial markets, with options ranging from tough new regulation of Wall Street investment banks to creation of a federal entity that would take over their bad assets, much as the Resolution Trust Corporation did during the savings-and-loan crisis of the 1980s.

Faced with the collapse in the past week of one of Wall Street's biggest players and the taxpayer-funded bailout of the nation's largest insurance company, congressional leaders said they were ready to contemplate dramatic intervention to steady troubled capital markets.

Treasury Secretary Henry M. Paulson Jr., Federal Reserve Chairman Ben S. Bernanke and other federal regulators were summoned to Capitol Hill to testify about the deepening crisis in hearings over the next several days. Richard S. Fuld, chief executive of Lehman Brothers, was called to appear before the House Committee on Oversight and Government Reform, which plans to "examine the regulatory mistakes and financial excesses" that led to the company's bankruptcy.

Meanwhile, Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, scheduled a hearing to begin debate over whether the government should further intervene in the markets by buying up distressed mortgage-backed assets and holding them until plunging home prices stabilize.

"We've had a series of ad hoc interventions. This is one more ad hoc intervention," Frank said after emerging from a hastily called meeting with Paulson and Bernanke about their plan to rescue insurance giant American International Group. "I think the question of a broader, more systemic action in which the government tries to help is obviously very important."

Democratic leaders in the House and Senate did not immediately endorse the idea of a federal entity to manage the assets of insolvent institutions, saying such a move would require talks with the White House and bank regulators. House Minority Leader John A. Boehner (R-Ohio) flatly dismissed it.

But other lawmakers on both sides of the aisle said an entity like the Resolution Trust Corporation is a tool Congress should consider.

"There is support for it . . . so I'm willing to think about it," said Sen. Robert F. Bennett (R-Utah), a senior member of the Senate Banking Committee who is also a close adviser to Senate Republican Leader Mitch McConnell of Kentucky. "Obviously, we're in a serious crisis."

Senate Majority Whip Richard J. Durbin (D-Ill.) said he isn't ready to sign on to any particular course of action. But "we're going to have to do something," he said. "There's an awful lot of the credit industry in our country and globally that is not subject to oversight or accountability. And we're reaping that whirlwind at the moment."

Durbin said Congress is unlikely to take any action this year. The House and Senate are set to adjourn next week for the November elections, and lawmakers are hoping not to return to Washington until January. And while a broad consensus appears to be building for new regulations to rein in the financial services industry, there is no agreement on what form those regulations would take.

Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee, said he plans to hold hearings during the winter recess to begin reassessing "the architecture of our regulatory structure." He blamed the Bush administration for contributing to the troubles on Wall Street through "mismanagement and deregulation," adding that he has been particularly "disappointed" with the chairman of the Securities and Exchange Commission, Christopher Cox, for permitting manipulative trading that further undermined struggling firms.

New regulations might prevent the next crisis, but they would do nothing to help ease the current one. A growing number of economists have been calling for the federal government to take additional action to prop up plunging home prices or purchase mortgage-backed assets from distressed financial institutions to restore confidence to the markets.

"I do think things really do call for a major action by the government," said Martin Feldstein, a Harvard economist who recently stepped down as president of the National Bureau of Economic Research. Home prices have already fallen more than 15 percent over the past year and would have to fall another 10 percent "to get back to their pre-bubble path," Feldstein said, adding that "there's nothing to stop house prices from overshooting on the way down just as they did on the way up."

Feldstein, an adviser to Republican presidential candidate John McCain, has called on the federal government to offer distressed borrowers low-interest "mortgage replacement loans" that would remove the incentive to default. A new version of the RTC "could help," he said, but "would be very expensive for taxpayers."

Edwin M. Truman, senior fellow at the Peterson Institute for International Economics and former assistant secretary to the U.S. Treasury, said there would be other hurdles to bringing back the RTC concept. During the savings-and-loan crisis, he said, the mission was clear: liquidating the assets of insolvent savings and thrifts.

This time around, a broad array of financial entities hold mortgage-backed securities, and decisions would need to be made about what kind of securities to buy up and from which institutions. "You could do this," Truman said, "but it is not going to be an easy thing to do."

Sheila C. Bair, who chairs the Federal Deposit Insurance Corporation, said on Bloomberg TV yesterday that Congress "would have to think hard" about taking over troubled assets the way the RTC did. From 1989 to 1995, the RTC liquidated almost $400 billion in assets from more than 700 insolvent thrifts.

But lawmakers looking for some mechanism to stop the bleeding have so far come up with few other options.

"You need a floor on this housing market before this economy is going to bounce back," said Sen. Charles E. Schumer (D-N.Y.). "Whether the RTC is the way to go is something that remains to be seen, but it's something that should be considered."

Staff writer Anthony Faiola contributed to this report.

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