Paulson Moves On to Nuts and Bolts of Rescue

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Congress Approves $700B Bailout Legislation

Congress approves a massive plan to shore up the U.S. financial system, despite a stunning early defeat. The Senate passed the legislation on Wednesday evening, and the House passed the legislation on Friday afternoon.

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Yesterday, Paulson said the expanded powers will give Treasury the flexibility to address the worsening credit crisis.

"There is no one-size-fits-all solution to alleviating the stress in our financial system," he said in a statement after President Bush signed the bill into law. "The broad authorities in this legislation, when combined with existing regulatory authorities and resources, gives us the ability to protect and recapitalize our financial system as we work through the stresses in our credit markets."

The bill gives Paulson a wide range of options to buy the troubled assets. In some cases, the Treasury plans to use auctions to obtain a low price. In other cases, the government can lend directly to firms, but it would likely require them to relinquish control over their executive pay and hand over a major equity stake to the Treasury. Similar conditions applied to the $85 billion government loan that rescued insurance giant American International Group last month.

Despite his expansive powers, Paulson faces a morass of legal and financial issues in setting up the program.

Treasury officials expect every decision -- including which firms these new hires come from, how much they will be paid by the government and potential conflicts of interest -- to be scrutinized by Congress and the news media.

The Treasury faces a delicate balancing act to properly price the assets it will buy. Treasury officials plan to begin buying simple mortgage assets to gain experience running the program. But under the bill, they can expand the scope of their purchases to any financial firm that has a meaningful presence in the United States and to any assets that are being held by these companies.

The trick, Paulson said in an interview earlier this week, is coming up with the right price. If the government overpays, taxpayers could be saddled with hundreds of billions of dollars in losses. Paying too little could force other banks to write down assets that are similar in nature, which in turn could trigger a cascade of bank failures.

"Whatever methodology they use, I'm sure they are going to be trying all kinds of things, so it will be a little bit of a learning experience," said Timothy Ryan, chief executive of Securities Industry and Financial Markets Association. "A lot of what they will be doing is answering . . . questions, and the biggest one is the transparency around pricing."

Treasury officials said they plan to make the process of finding the right price transparent to help the market accurately value all of its assets, even the ones that the government does not buy.

Treasury got a head start on the work. Last month, Paulson tapped Ed Forst, a Harvard University executive who formerly worked for Paulson when they were at Goldman Sachs, to work on setting up the plan, even while Congress was still debating the bill.

"Paulson did not want to lose precious days waiting for Congress to pass the final bill before putting together the implementation plan," said Howard Glaser, president of the mortgage consulting firm Glaser Group.

Glaser also predicts Treasury will focus on helping community banks, Glaser said.

"Supporting the smaller regional banks and thrifts provide critical political support for Treasury's efforts . . . and they are very stabilizing in their communities," he said. "Congressmen who had to swallow hard to vote for this thing will feel a lot better about it if they see the impact in their local communities."

While it is imperative for Treasury to get the program running as soon as possible to prevent more collapses in the financial system, Ryan said, "doing the program right is more important than doing it quickly."