/ 21 September 2008

US Congress examines $700bn market bailout plan

The Bush administration asked Congress on Saturday for $700-billion to bail out firms burdened with bad mortgage debt, seeking extraordinary authority as it tackles the worst financial crisis since the Great Depression.

Democratic lawmakers, who control both houses of Congress, said they hoped to approve the bailout quickly but wanted changes such as more oversight, limits on executive pay at participating firms, and assistance for homeowners.

US Treasury Secretary Henry Paulson would have sweeping powers over the massive war chest and his decisions would not be reviewed by any court, according to a copy of the draft legislation.

The government could acquire up to $700-billion in home and commercial mortgages and related assets from US-headquartered banks and other institutions over the next two years.

But even the conditions on the type of assets and the source of them could be waived by the Treasury secretary, in consultation with the chairperson of the Federal Reserve, if necessary to stabilise markets, according to a statement issued late on Saturday by the Treasury.

To allow for the bailout, the US government’s debt limit would rise to $11,315-trillion from $10,615-trillion.

The bailout plan follows a wrenching week that transformed Wall Street with Lehman Brothers’ failure, the agreed sale of Merrill Lynch and a government takeover of ailing insurer AIG.

The debt plan was hatched amid grave concerns that other major banks could collapse and that credit markets were close to freezing, threatening the functioning of the US economy.

Showing more deals may still be in the works, Morgan Stanley’s board was scheduled to meet on Saturday to consider a possible takeover by Wachovia Bank or selling a bigger stake to China Investment Corporation, according to sources familiar with the situation.

Senior Bush administration officials have pressed their counterparts in Japan, Germany, Britain and other nations to establish similar rescue plans for their own troubled financial firms, the Washington Post reported in its Sunday editions.

With the House of Representatives and Senate aiming to consider it within days, aides for lawmakers from both parties were expected to pore over the hastily drafted plan all weekend.

Treasury Secretary Henry Paulson ”is in effect becoming the dictator of the American financial system for a few months, subject to congressional oversight”, said Wall Street historian John Steele Gordon, author of a book about the national debt.

Democrats critical
Congressional Republicans generally praised the Bush plan and called for its swift enactment, while Democrats said it left important questions unanswered and needed work.

House Speaker Nancy Pelosi said Democrats would work with the Bush administration to swiftly respond to the turmoil, but would strengthen the proposal.

”We will also seek to protect lower- and middle-income Americans … from the fallout of the ongoing Wall Street crisis, by enacting an economic recovery package that creates jobs and returns growth to our economy,” she said.

But Senate Republican Leader Mitch McConnell of Kentucky said ”now is not the time for partisan plans or pet projects”.

New York Democratic Senator Charles Schumer, chairperson of Congress’ Joint Economic Committee, whose state is home to many large financial firms, said speed was essential despite the plan’s shortcomings.

”The aim is to get this on the president’s desk by Friday,” Schumer told a press conference in New York City.

President George Bush said he initially thought the government could deal with the crisis ”one issue at time”, but the risk of more trouble required bold action to save jobs and retirement accounts.

”I’m sure there are some of my friends out there saying, I thought this guy was a market guy; what happened to him?” Bush said at the White House.

Bad debt
Authorities have now turned their focus to the origin of the credit crisis — the rising tide of bad mortgage debt after banks and other institutions bet heavily on mortgage-backed securities that lost value as homeowners struggled to make mortgage payments.

Treasury’s purchase plan would at least help price such broken assets, said Jan Hatzius, chief US economist at Goldman Sachs, one of the few major investment banks to survive the shakeout.

”Congress will want to add a lot of detail over the next few days so things could get pretty confusing,” Hatzius said, noting it is not clear how the plan would clarify banks’ balance sheets or inject capital into them.

Under the draft legislation, Treasury could hire asset managers to handle the debt purchases, which could include residential or commercial mortgages and related instruments originated or issued on or before September 17 2008.

The authority to purchase would end two years from the date of enactment, but authority to hold the assets would continue.

Treasury said it planned to establish the price of the securities it buys through market mechanisms, where possible.

Republican Senator John McCain and Democratic Senator Barack Obama, one of whom will inherit the problem after the November 4 presidential election, have skirmished over the financial crisis as they campaigned this week. Both said they were reviewing the plan.

Markets have shown approval so far of the administration’s latest efforts, but may be disappointed if Congress does not swiftly back the plan. US stocks had their best day in six years on Thursday on talk of an aggressive plan. On Friday the Dow Jones industrial average rose about 3,4%.

Crisis was spreading
The plan to buy back mortgage-related debt was just one measure unveiled in the last two days.

The Treasury said on Friday it would siphon up to $50-billion from a fund established in the 1930s to conduct foreign exchange market intervention to backstop the rattled US money market mutual fund industry, home to some $3,5-trillion of deposits.

Money market fund assets dropped by a record $169,03-billion in the week ended September 17 as investors pulled money out.

The US Securities and Exchange Commission got involved too, imposing on Friday a 10 trading-day ban on short sales of 799 financial stocks.

And the administration will step up a programme announced this month to directly buy mortgage-backed securities in the market, and said Fannie Mae and Freddie Mac would also increase their buying to try to get credit flowing. – Reuters