By Lori Montgomery
Washington Post Staff Writer
Thursday, September 18, 2008
The frenetic pace of the financial crisis has forced the Treasury Department and Federal Reserve to make rapid-fire decisions in recent days, leaving Capitol Hill lawmakers effectively impotent -- and frustrated.
Lawmakers on both sides of the aisle expressed concern yesterday that they have had no control over when and how federal money has been used to curb the panic on Wall Street. While many have been convinced that the moves so far have been necessary to prevent a wider financial meltdown, they said they felt confined to the sidelines as power to make momentous decisions has been concentrated in very few hands.
House Speaker Nancy Pelosi (D-Calif.) said she has dispatched Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, to determine whether Federal Reserve Chairman Ben S. Bernanke should retain authority to unilaterally bail out failing firms, as he did Tuesday with a loan of $85 billion to insurance giant American International Group.
Congressional leaders learned of the rescue late Tuesday during a hastily called meeting in the Capitol with Bernanke and Treasury Secretary Henry M. Paulson Jr., who explained the deal after it was done.
"My instincts and my gut tell me they made the wrong move. But I don't have all the information they do," said Rep. Paul D. Ryan (R-Wis.), the senior Republican on the House Budget Committee, who yesterday fielded furious calls from constituents. "People are angry because they see this as their tax dollars bailing out Wall Street speculators. And in some cases, it is."
Paulson and Bernanke have taken the lead not only from lawmakers but from President Bush. Bush has left direct management of the crisis to them and other advisers, and has limited his public remarks on the economy. On Tuesday, he canceled plans to brief reporters after meeting with his economic advisers.
Yesterday, asked by reporters why Bush had not addressed the issue of the economy more directly in the midst of a crisis, White House spokeswoman Dana Perino said Bush was wary of holding news conferences in general because he didn't want to distract from the presidential campaign.
"I grant you that it's been a while," she said, "and I understand that people want to hear from the president during this time." Last night, the White House said Bush called off a scheduled trip to Alabama and Florida today to meet with his economic team.
Republicans in the House have scheduled a news conference for today to protest the string of bailouts that began in March with Wall Street investment bank Bear Stearns and extended in recent weeks to mortgage-finance giants Fannie Mae and Freddie Mac, as well as AIG. The latest decision was particularly hard to swallow, some lawmakers said, because it came just one day after Paulson refused to intervene to save Lehman Brothers Holdings and indicated that further rescues were unlikely.
"Just how long can the poor beleaguered taxpayer be expected to bear all the losses and bear all the risk?" said Rep. Jeb Hensarling (R-Tex.), one of the protest's organizers. "Lehman Brothers must have the worst lobbyist in town, since they are the only ones that appear to have lost out on the bailout mania."
Republicans and Democrats alike said the crisis is in part the result of insufficient government regulation on Wall Street. Frank and Rep. Henry A. Waxman (D-Calif.), chairman of the House Committee on Oversight and Government Reform, both plan hearings aimed at exposing regulatory failures and developing a new system for managing the bad assets of financial institutions collapsing under the burden of their investments in a plummeting housing market.
With Congress scheduled to adjourn next week, no one expects quick action, and there's a good reason for that, said Senate Majority Leader Harry M. Reid (D-Nev.).
"No one knows what to do," Reid told reporters. "We are in new territory here. This is a different game." Even Bernanke and Paulson aren't sure how to fix the system, he said, "but they are trying to come up with ideas."
One idea that's rapidly gaining currency is the creation of a new federal entity that would acquire "toxic" mortgage-backed assets from failing firms and hold them until the housing market improves. Economists including former Fed chairman Paul Volcker and former Treasury secretary Lawrence Summers have endorsed the idea. Summers, who served in the Clinton administration, is scheduled to speak to Senate Democrats at a luncheon today.
Setting up such an entity also would give lawmakers a chance to determine the parameters of future bailouts, as opposed to leaving the decision in Bernanke's hands. While most lawmakers said they trust Bernanke's judgment, Frank said he was troubled to learn in the meeting Tuesday that Bernanke has legal authority to use the central bank's reserves, which total $888 billion, to make loans to any entity under any terms he deems economically justified.
"No one in this democracy -- unelected -- should have $800 billion to dispense as he sees fit," Frank said. "It may be that there is so much bad debt out there clogging our system that we may have to have some intervention. But it shouldn't be the unilateral decision of the chairman of the Federal Reserve with the backing of the secretary of the Treasury."
Pressed by lawmakers at the Tuesday meeting to justify the AIG rescue, Bernanke argued that the insurance giant was deserving of government help because of its broad reach into global financial markets. But several lawmakers said it was not clear to them how Bernanke and Paulson were deciding which firms would be allowed to fail and which would be saved.
"They made very clear that they could give us no assurance that there wouldn't be other shoes that would drop," said Sen. Kent Conrad (D-N.D.), chairman of the Senate Budget Committee. "They also did not draw any bright line distinction in how they would handle things going forward."
Conrad said Paulson and Bernanke also could not say what the effect might be on the federal budget, which is already running up near-record deficits. Nor could they say what the ultimate cost to taxpayers might be.
"These massive amounts, it is deeply troubling," said Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee. "You start by taking $29 billion for Bear Stearns, $200 billion with Fannie and Freddie. Not to mention the discount window stuff. It is mounting. And it is deeply troubling."
If Bernanke and Paulson have a coherent strategy, many Republican lawmakers say they do not understand it, either. Rep. Adam H. Putnam (R-Fla.), chairman of the House Republican Conference, yesterday urged the administration to send an "envoy" to Capitol Hill to explain their decisions, as well as "the nature of the events that are unfolding in front of us" at this "historic moment."
"There's a great deal of confidence in Bernanke, but that reservoir is not limitless," Putnam told reporters. "People need to understand what the guiding principles are behind this ad-hoc strategy and how you decide that AIG is worthy of a bailout and that Lehman is not and that Bear Stearns is and Fannie. There has to be some better understanding of that."