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Washington Readies Sea Change for Wall Street
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To cover the cost of the program, Treasury would have to borrow $700 billion, a sum Sen. Charles E. Schumer (D-N.Y.), the chairman of the Joint Economic Committee, yesterday called "breathtaking." Since 2003, Congress has appropriated just more than $600 billion for the Iraq war. The rescue package could exceed that in a matter of months, but the government could potentially recoup its investment if it is able to resell troubled assets at a profit.
To accommodate the new debt, the proposal seeks to increase the legal debt limit to $11.3 trillion. The limit was last raised in July -- to $10.6 trillion -- when Congress gave Treasury Secretary Henry M. Paulson Jr. authority to salvage struggling mortgage finance giants Fannie Mae and Freddie Mac. The nation's debt currently stands at $9.6 trillion.
It is unclear how the new spending would affect the annual deficit, which is already at near-record levels. Taken together with Treasury's promise to spend up to $200 billion to keep Fannie Mae and Freddie Mac solvent, budget experts said the broader rescue plan could easily leave the next president facing a budget hole that approaches 6 percent of the overall economy, a tide of red ink not seen since the Reagan administration.
At a meeting Thursday in the Capitol, administration officials told lawmakers the bailout would cost about $500 billion, but they did not have a good estimate at the time, according to sources familiar with the matter. Final calculations were completed just before the proposal went to Congress.
A number of other provisions were also in play, including whether the bailout should include securities backed by loans other than mortgages. In the end, Treasury decided to focus only on residential and commercial mortgages.
Commercial mortgages have become a concern for regulators as the delinquency rate hit 8.1 percent at the end of June, the highest rate for any category of bank loans, according to the Federal Deposit Insurance Corp. The rate more than tripled from 2.4 percent at the end of June 2007, and the trend already has caused some bank failures.
Treasury also considered permitting foreign firms active in the United States to participate in the program, but decided instead to push other nations to rescue their own companies.
Yesterday, British Prime Minister Gordon Brown said his government would do "whatever it takes" to "sort out the financial system." Brown said he realized earlier this week, when he was notified that Britain's biggest lender, HBOS, was facing collapse, that "we are in a different world."
An official at the Bank of England who spoke on condition of anonymity said the bank has been in constant contact with its U.S. counterparts to try to win a "global response to a global problem." The European Central Bank declined comment.
On Capitol Hill, Democratic and Republican leaders gave the proposal somber reviews and promised to act quickly. Paulson has asked that the plan be approved before Congress adjourns Friday in advance of the November elections. Frank said lawmakers could meet that goal, even with the addition of several controversial provisions favored by House Democrats.
Frank said the most nettlesome is likely to be their demand that bankruptcy judges be authorized to modify mortgages on primary residences, as they now can for second homes. The banking industry fiercely opposes the idea, saying it would drive up mortgage interest rates, and a similar proposal failed in the Senate earlier this year.
House Speaker Nancy Pelosi (D-Calif.) also plans to renew her campaign for a second stimulus package. Democrats have called for spending about $50 billion on highway projects, unemployment benefits and other social programs to create jobs and stimulate consumer spending.
