Congress gets $700 billion financial bailout plan
Sat Sep 20, 2008 11:50am EDT
WASHINGTON (Reuters) - The Bush administration sent a $700 billion financial markets rescue plan to Congress on Saturday where Democrats are looking to add aid for distressed homeowners and other measures to help average citizens in addition to Wall Street.
The plan to buy mortgage-related debt off the balance sheets of U.S. banks and other financial institutions is part of an all-out attack on the worst financial crisis since the Great Depression.
The U.S. Treasury Department would be authorized to purchase as much as $700 billion in mortgage-related assets from U.S. based institutions, according to a copy of the department's draft legislation obtained by Reuters.
In a related move, the proposal would raise the U.S. government's debt limit to $11.315 trillion from $10.615 trillion.
Congressional leaders have promised swift action on the bailout package but many details are still to be worked out.
As lawmakers' aides huddled on Capitol Hill, President George W. Bush acknowledged the plan would put large amounts of taxpayer money on the line to buttress shaky financial markets.
"But I'm convinced that this bold approach will cost American families far less than the alternative," he said in his weekly radio address.
"Further stress on our financial markets would cause massive job losses, devastate retirement accounts, further erode housing values, and dry up new loans for homes, cars and college tuitions."
"We must now take further, decisive action to fundamentally and comprehensively address the root cause of our financial system's stresses," Paulson said at a news conference.
"We're talking hundreds of billions. This needs to be big enough to make a real difference and get at the heart of the problem."
U.S. stocks, which chalked up their best day in six years on Thursday as talk of the more aggressive approach spread, soared again on Friday. The blue chip Dow Jones industrial average closed up 368 points, or about 3.4 percent.
The news also caused waves in the U.S. presidential campaign. Republican hopeful Sen. John McCain knocked the Treasury for taking a haphazard approach to the crisis, while rival Democrat, Sen. Barack Obama, supported the latest moves.
$1 TRILLION
Paulson and Federal Reserve Chairman Ben Bernanke have already put close to $1 trillion of taxpayer money on the line to try to keep credit flowing.
At a meeting with congressional leaders on Thursday night, Paulson and Bernanke made the case for aggressive action to get ahead of events that could devastate an already weak economy.
"When I heard his description of what might happen to our economy if we failed to act, I gulped," Democratic Sen. Charles Schumer of New York said, referring to Bernanke's appraisal.
A congressional aide on a telephone conference call between the Fed, Treasury and lawmakers on Friday said Bernanke issued a stark warning: "If Congress doesn't act soon, there will be an economic meltdown."
Fed spokeswoman Michelle Smith declined to comment directly on the accuracy of the chairman's reported remark, but confirmed that he painted "a dark scenario".
At his news conference, Paulson said the latest plan was the best hope of ultimately protecting the public purse and avoiding a grave recession.
"I am convinced that this bold approach will cost American families far less than the alternative -- a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion," he said.
A Treasury official said hedge funds and non-U.S. financial institutions would not be allowed to offload troubled assets under the plan.
The banking industry sources said "reverse auctions" would be held to purchase $50 billion tranches of debt, which could include residential and commercial mortgages and mortgage-backed securities. One source said the purchases would then be made in further increments of $10 billion and that five outside asset managers would help run the auctions.
A Treasury spokeswoman declined to comment on those details, although the Treasury did confirm asset managers would be hired.
PILING ON DEBT?
The White House said it was too soon to say how the plan would impact the nation's debt, and said it was possible many of the funds could be recovered as markets stabilize and currently bad assets are sold off.
An industry source said there would be no limit on how long the government could hold the debt, which would have had to have been on selling institutions' books as of September 15.
The free market for all intents and purposes is dead in America," said Sen. Jim Bunning of Kentucky. The U.S. Treasury's proposal would "take away the free market and institute socialism in America," he said in a statement on Friday.
But financial markets have shown their approval and may be disappointed if Congress does not swiftly back the measures.
U.S. stocks chalked up their best day in six years on Thursday as talk of the more aggressive approach spread and on Friday the blue chip Dow Jones industrial average closed up 368 points, or about 3.4 percent.
The U.S. Treasury and Federal Reserve have already put close to $1 trillion of taxpayer money on the line to try to keep credit flowing.
And banks worldwide have suffered more than $500 billion of write-downs and loan losses since the global credit crisis began more than a year ago.
The crisis grew more acute this month with government takeovers of mortgage companies Fannie Mae and Freddie Mac; the bankruptcy of Lehman Brothers Holdings Inc; Bank of America Corp's shotgun agreement to buy Merrill Lynch & Co; and a bailout of insurer AIG. This came just six months after a government-backed rescue of investment bank Bear Stearns.
(Writing by Tim Dobbyn, editing by Jackie Frank)
AI
Market Data 
Markets 
