Washington Readies Sea Change for Wall Street
Sunday, September 21, 2008
The Bush administration yesterday raised the price tag on its emergency plan to revive the U.S. financial system, asking Congress for authority to spend up to $700 billion to relieve crippled financial institutions of their mortgage-based assets, an investment that would exceed the current cost of the Iraq war.
Senior administration officials meanwhile pressed their counterparts in Japan, Germany, Britain and elsewhere to establish similar programs to rescue their own troubled firms in what would be an unprecedented bailout of the worldwide financial system. The move comes in recognition that complex interconnections among financial institutions have created a global crisis that the United States cannot solve alone.
Congressional leaders responded positively to the administration's rescue plan, though the price tag was $200 billion higher than they had been told to expect just three days ago. But House Democrats said they would push to include a number of contentious provisions that could make it difficult to pass the plan quickly, including limits on executive compensation for firms that unload their bad assets on the government and new powers for bankruptcy judges to modify mortgages on primary residences.
Democrats also want President Bush to drop his opposition to a second round of federal spending aimed at stimulating the economy. While the administration's bailout plan would insure the money market funds of millions of ordinary Americans and help prop up the mortgage market, some Democrats worry that it will primarily be viewed as a bailout for big Wall Street firms.
"Obviously, this is of direct benefit to some people in the financial industry," Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, said of the rescue plan. "We need to be talking about direct benefits to people who are not in the private sector."
Bush, speaking to reporters during a White House appearance with Colombian President Álvaro Uribe, urged Democrats to set aside those demands. In talks with congressional leaders, Bush said he "found a common understanding of how severe the problem is" and the need for urgent action. "We need to get this done quickly and, you know, the cleaner the better,'' he said.
Bush also defended the size of the request, saying drastic action was needed because of the magnitude of the financial crisis, a cataclysm that started with nontraditional mortgage loans to U.S. homeowners, spread to the banking and financial services industry and now is enveloping markets around the world.
"This is a big package because it's a big problem," Bush said. "The risk of doing nothing far outweighs the risk of the package."
Bush, who campaigned as the nation's first MBA president and a free-market advocate, also appeared to address complaints from conservatives that the plan inserts the government too much into the economy.
"I'm sure there are some of my friends out there that are saying, 'I thought this guy was a market guy, what happened to him?' " Bush said. "My first instinct was to let the market work, until I realized, upon being briefed by the experts, how significant this problem became.''
The proposal itself is just three pages long. But it lays out the most sweeping government intervention in the private sector since the Great Depression. In addition to $700 billion, the plan seeks vast new powers for the Treasury secretary to purchase mortgage-based assets from U.S.-based financial institutions over the next two years, to hire people to manage that portfolio and to issue regulations to stabilize the mortgage market as the secretary "deems necessary."
The measure sets no limit on how long Treasury could hold the assets, which must have been issued before Sept. 17. But the goal would be to sell them after housing prices recover and to earn back much of the money.