U.S. Forces Nine Major Banks To Accept Partial Nationalization

During debates on Capitol Hill, Paulson repeatedly described that measure as a way to shore up ailing financial institutions by buying their troubled mortgage securities and other assets.

Now that he has decided to use the $250 billion installment to pump capital directly into the banking system, he is planning to immediately ask Congress for a second installment of $100 billion to buy or insure the assets from institutions, according to congressional staff and banking industry executives briefed on the plan.

"When I was talking to members of Congress back then, they believed they were voting to buy up troubled assets, not to make capital infusions in banks," said Alan Blinder, a Princeton economist and a former Fed vice chairman. "If I were a member of Congress, I would be wondering about bait and switch because that was not really discussed."

Among the first to push the idea of injecting money into banks in exchange for an equity stake was Rep. Spencer Bachus (R-Ala.), who proposed the idea at a Sept. 18 night meeting on Capitol Hill that included legislators as well as Paulson and Federal Reserve Chairman Ben S. Bernanke.

After Paulson described his plan for the Treasury to buy up mortgage backed securities, Bachus suggested there were certainly other ways to address the crisis. "There has to be alternatives," he recalled telling the group, in an account that is consistent with accounts of others who were present at the meeting. "Why not inject capital into the institutions?"

At the meeting, Rep. Barney Frank (D-Mass.) and Sen. Jack Reed (D-R.I.) expressed support for the idea, according to people at the meeting.

But Treasury officials "said this is a crisis and that there was no time," Bachus said. Paulson "was very fearful that if we didn't do something immediately, we were going to see terrible things happen."

He said he thought that Paulson had acted with "integrity" but that "I do believe they had this one plan, and they were saying 'This is it.' "

Bachus answered the objection by saying that the government could take a non-voting stake in the institutions. But opponents in the meeting, including Treasury, were unmoved.

"I do think there were some ideological predisposition against capital injections," Sen. Charles E. Schumer (D-N.Y.) said of the meeting. Also, "their view was that it would take too long because you'd have to do it on a bank-by-bank basis."

Yesterday, few lawmakers took issue with the plan to recapitalize banks. But key Democrats argued that strict executive compensation limits should apply to any institution that accepts government money.

"Restrictions on executive compensation will ensure that taxpayer money is not wasted enriching the same people whose poor decision-making created this crisis," Schumer wrote in a letter to Paulson yesterday. "It is imperative that these restrictions, including limitations on the incentives for executives to take excessive risks and the elimination of golden parachutes, should apply to any capital injection program."