The Deal Is Done

Monday, September 29, 2008

CONGRESS AND the Bush administration appear to have completed the monumental task of designing a rescue plan for the U.S. financial system. And they have done so remarkably swiftly -- just 10 days after Treasury Secretary Henry M. Paulson Jr. and Federal Reserve Board Chairman Ben S. Bernanke somberly warned of an imminent collapse that could have led to sudden bank failures, mass unemployment and the widespread loss of retirement savings.

There have been bumps along the road -- the most significant of which was a contentious White House meeting sparked by the highly dramatic and seemingly counterproductive intervention of Republican presidential nominee John McCain. But as difficult and bitter as the process has been, the rescue, if it passes both houses of Congress, could be remembered as a case study in bipartisanship under extremely difficult circumstances. Perhaps Washington is not quite as irredeemable as the campaign's rhetoric would have it.

Of course, that hopeful interpretation hinges on whether the plan succeeds in its objective: restoring a measure of normality to credit markets that have verged on dysfunctional in recent days. At its core, the plan closely follows Mr. Paulson's original proposal. It authorizes up to $700 billion in government purchases of "troubled assets": securities backed by soured mortgages that are unmarketable under current conditions and are eating away at banks' capital like viruses devouring computer memory. Under the compromise reached yesterday, the money would be doled out to the Treasury in installments, with $250 billion provided up front, but the conditions on releasing the rest are reasonably flexible.

The government buy-up should permit banks to raise new capital and to resume lending to one another. If all goes really well, the eventual cost to the government will be nowhere near $700 billion, since the government could end up selling at least some of the securities for more than it paid for them.

Still, the final plan reflects the legitimate concerns of Democrats and Republicans that Mr. Paulson's proposal provided for almost no formal oversight of what is bound to be a complex process fraught with potential conflicts of interest. The agreement creates an oversight board appointed by bipartisan congressional leaders, permanent Government Accountability Office surveillance and an independent inspector general. The plan also now gives the Treasury a strong option to take equity in companies from which it buys securities, so that taxpayers can participate in any profits. To satisfy populists in both parties, there are restrictions on executive pay and severance packages. The plan also contemplates that the Treasury will use its new market clout to encourage loan modifications and other workouts for troubled homeowners; and in a concession to House Republicans, there will be an option to insure rather than buy some mortgages.

Both Mr. McCain and his Democratic rival, Sen. Barack Obama, signaled yesterday that they could live with the plan. This is as it should be, considering that the alternative to this admittedly imperfect and highly uncertain program could be much, much worse -- and that one of them will soon have to make sure that the plan does, indeed, work.

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