This article misstated the first name of James B. Lockhart III, the head of the Federal Housing Finance Agency.
Historic Market Bailout Set in Motion
Saturday, September 20, 2008
The Bush administration yesterday proposed a historic $500 billion bailout of financial firms that would let the government rather than the cold judgment of the marketplace decide the winners and losers from the crisis that has shaken the U.S. economy for the past year.
The plan, which would be the most sweeping government intervention in the markets since the Great Depression, calls for the Treasury to buy the troubled mortgage securities that have been toppling major financial firms and are at the heart of Wall Street's turmoil.
Millions of Americans could also benefit from other dramatic stopgap measures. Regulators announced efforts to stabilize the mortgage market; curb stock speculation; and insure money-market mutual funds with government money, seeking to protect ordinary investors and preserve a vital source of corporate finance.
The initiatives were precipitated in part by concern that scared investors would race to withdraw their holdings from money-market funds, which hold $3.5 trillion in investments, depleting a major source of short-term funding for corporations.
President Bush, who had remained largely silent as the crisis broadened this week, said it is a "pivotal moment for America's economy." In a Rose Garden speech remarkable for its grim language and ominous tone, Bush said: "This action does entail risk. But we expect that this money will eventually be paid back. . . . The risk of not acting would be far higher."
Treasury Secretary Henry M. Paulson Jr. acknowledged that the federal government's previous policy of addressing corporate failures on a case-by-case basis had not stemmed the accelerating crisis. He said the new comprehensive strategy has a better chance of calming the turmoil that froze critical segments of the credit markets and sent stock markets into a tailspin earlier this week.
"I am convinced that this bold approach will cost American families far less than the alternative -- a continuing series of financial institution failures and frozen credit markets," Paulson said in a speech at the Treasury Department.
The Bush administration, Federal Reserve Chairman Ben S. Bernanke and congressional allies launched a major offensive yesterday to persuade lawmakers to support Paulson's proposal. Because the plan needs the approval of Congress, officials from the Treasury and the Fed are worried that delay by lawmakers would spark fresh anxiety in the markets. They are working with congressional leaders to pass the plan by the end of next week, which would be extraordinarily quick for Capitol Hill.
"I am very optimistic that we can pass a balanced and comprehensive plan within a week," said Sen. Charles E. Schumer (D-N.Y.), who chairs the Joint Economic Committee. "Chairman Bernanke made all too clear the cost of inaction."
Some lawmakers, including Sen. Richard C. Shelby (Ala.), the ranking Republican on the Senate Banking Committee, have expressed concerns about the plan's cost, chance of success and possible unintended consequences. Such opposition could delay passage. "We are being asked to go 'all in' with taxpayer dollars, and once our government and the taxpayer is on the hook, there is no fallback option," said Rep. Jeb Hensarling (R-Tex.), a leading conservative. "At the moment I remain skeptical, fearful and unconvinced that this is the proper remedy for our nation."
Paulson and Bernanke held a morning conference call with more than 100 House Republicans, making the case for their plan and describing in "strong and serious" terms the dire situation facing the financial system, according to a participant on the call.
Hours later, the House Republican leadership met with members and lobbyists to warn against cluttering the legislation with amendments or trying to delay its passage. The message, according to a person at the meeting: We want a clean bill.