Carolyn Lochhead, Chronicle Washington Bureau
Tuesday, September 23, 2008
(09-23) 04:00 PDT Washington — Congressional Democrats worked Monday to reshape the lame-duck Bush administration’s jaw-dropping request for an additional $700 billion and unprecedented authority to buy distressed assets to prevent a financial meltdown, amid a sense of deja vu on Capitol Hill over a similarly open-ended war resolution that Congress gave the administration six years ago.
House Speaker Nancy Pelosi, D-San Francisco, insisted on altering the proposal made over the weekend by Treasury Secretary Henry Paulson to include greater oversight of the new Treasury fund that would buy and dispose of distressed assets, more aid for homeowners facing foreclosure, and curbs on huge Wall Street compensation packages.
Democrats are caught between wide agreement that the nation stood on the brink of an economic abyss last week when credit markets froze and constituent anger at bailing out Wall Street.
Working in consultation with Democratic presidential nominee Sen. Barack Obama, Pelosi and other Democratic leaders walked a narrow path. They said they want to move quickly to shore up confidence and secure Democratic priorities from an administration they blame for the crisis.
Pelosi also wants an economic stimulus and a spending bill that would include a $25 billion loan for ailing Detroit automakers, infrastructure spending and expanded unemployment insurance, among other things.
The crisis atmosphere gives Democrats considerable leverage to force the administration to accept their demands. On Monday, stock markets and the dollar sank while oil prices jumped.
“We accept reluctantly, as everybody does, the fact that bad decisions in the private sector unconstrained by appropriate regulation have brought us to the point where we have to do this,” said Rep. Barney Frank, chairman of the House Financial Services Committee and Pelosi’s point man on the crisis.
In a win for Democrats, Frank said he and Paulson had agreed to create a congressional oversight board as part of the bailout.
Still, angry rumblings continued to grow in the rank and file of both parties as lawmakers dribbled back to Capitol Hill and began expressing outrage at both the price tag and the extent of the authority that the administration wants.
Sen. Dianne Feinstein, D-Calif., called the initial proposal by Paulson a nonstarter.
“To ask Congress to pass a $700 billion bill, and hand this to one person with no oversight, I think is not at all prudent,” Feinstein said. “This is a difficult situation. There’s a need for prompt action, but it should be prudent.”
Sen. Barbara Mikulski, D-Md., warned that the Iraq war resolution and the Patriot Act that expanded government surveillance powers were “stampeded” through Congress in the name of emergencies. “We need to ask tough questions,” Mikulski said. “How do we know it will work? Will it cause runaway inflation?”
Conservative Republicans oppose the bailout but are unlikely to stop it. Frank said he expects the bill to be ready by early next week, a time frame some economists called shocking for legislation with such enormous – and still unknown – consequences. Much of the plan is being crafted on the fly in late-night meetings on Capitol Hill amid frantic lobbying by the financial industry and outside interest groups.
Already, the American Bankers Association prevailed on the administration to alter its guarantee for money market funds, arguing that the open-ended backstop had threatened to trigger a flight from bank deposits.
While supporting the intervention, regulatory expert Robert Litan of the Brookings Institution said, “It cannot be disputed that all of this financial firefighting may create serious long-term problems,” including the potential for the so-called moral hazard, which encourages still more excessive risk taking in the future on the expectation that taxpayers will pick up the losses.
Sen. Jim DeMint, R-S.C., warned that the bailout will swell the federal debt and “send the value of the dollar into a free fall as investors around the world question our ability to repay our debts. It’s also very likely that this plan will extend the cycle of bailouts, encouraging other companies to behave in reckless ways.”
The government’s budget position, already bad, will be made worse, said Dan Seiver, a finance professor at San Diego State University. He said the $700 billion is probably an underestimate, once all the additional aid for homeowners that Democrats want, plus the Treasury’s extension over the weekend of the offer to buy up debt to U.S. affiliates of foreign banks. “Which is only fair,” Seiver said. “We don’t want the rest of the world even angrier at us, saying you have to hold your toxic junk.”
Over the longer term, the U.S. fiscal position “just got significantly worse because we’re going to float a lot more of our paper out there, and we’re going to have a bunch of junk on our balance sheet that we didn’t have before,” Seiver said, predicting that interest rates could rise over the next decade. “If you’re the Chinese, how much more American paper do you want to take when we’re not backing it up as well as we used to?”
Democrats seemed sure to win restrictions on executive compensation in companies getting aid, and they are pushing to allow bankruptcy judges to renegotiate homeowner mortgages.
Sen. Barbara Boxer, D-Calif., said aid to homeowners is necessary to “get to the root of the housing crisis and work to keep people in their homes through refinancing; if we don’t, housing prices will continue to free-fall and we will still be in a mess.” Boxer said California has more foreclosures than any other state, with more than 101,000 homeowners receiving foreclosure notices in August.
coordinating with obama
Frank said he spoke with Obama on Sunday and has “talked to people on his economic team. They’ve been talking to the speaker” too, he said. Congressional aides said Democrats want to “stay on the same page” with the Obama campaign.
Obama renewed his support for a bailout, extra help for homeowners, middle-class tax relief and a regulatory overhaul. At a rally in Wisconsin on Monday, he added a promise to cut federal spending on contractors by 10 percent and go through the federal budget to see which programs could be cut, a promise that mirrors Republican rival John McCain’s promise to comb the budget for savings.
“I am not a Democrat who believes that we can or should defend every government program just because it’s there,” Obama said.
McCain, for his part, joined Obama’s call for more help for homeowners, after resisting such aid months ago as a bailout for reckless borrowers. He also joined Democrats in calling for much more scrutiny of the Bush administration’s bailout plan.
“Never before in the history of our nation has so much power and money been concentrated in the hands of one person,” McCain said at a rally in Scranton, Pa. “This arrangement makes me deeply uncomfortable. We will not solve a problem caused by poor oversight with a plan that has no oversight.”
Key elements of the $700 billion bailout plan submitted by the Bush administration to Congress, plus changes sought by Democrats:
— Give the Treasury secretary broad authority to buy up to $700 billion in virtually any kind of bad asset – including credit card debt or car loans – from any financial institution in the United States or abroad in order to stabilize markets.
— Raise the $10.6 trillion statutory limit on the national debt to $11.3 trillion.
— Allow the Treasury secretary to buy, hold and sell the assets in any way he sees fit. That includes the ability to go outside normal government contracting practices to hire private companies to manage them.
— Give the government power to designate financial institutions as “financial agents of the government” and require them to carry out any “reasonable duties” that entails.
— Require the administration to report to congressional budget, tax-writing and financial services committees within three months of using the authority and every six months thereafter.
— Instruct the Treasury secretary to consider both providing market stability and protecting taxpayers in using the bailout power.
— Shield program from judicial review.
— Program expires two years after enactment.
— Closer oversight, including an emergency board to keep an eye on the program, with two congressional appointees and a special inspector general appointed by the president.
— Limit the kind of troubled debt that the government can buy to mortgage-related investments.
— Require that the government get shares in the troubled companies helped by the rescue.
— Create a means to help prevent foreclosures on the mortgages acquired as part of the bailout.
— Change the law to give bankruptcy judges the authority to rewrite mortgages to lower homeowners’ monthly payments.
— Place limits on the executive pay packages of companies that unload their bad assets on the government.
— Limit the program to financial institutions with “significant operations” in the United States and exclude foreign central banks and companies owned by foreign governments.
— Expires at the end of 2009.
Source: Chronicle news services
The bailout plan submitted to Congress seeks vast powers for the Treasury secretary to purchase troubled assets from financial institutions over the next two years, to hire people to manage that portfolio and to issue regulations to stabilize the mortgage market as the secretary “deems necessary.”
U.S. financial chief:
The plan essentially rewrites the job description so that the Treasury secretary is not only the overseer of the government’s tax revenue and fiscal policies domestically and abroad, as before, but also in effect becomes the chief executive for the nation’s financial system.
Huge line of credit:
Under the plan, the secretary would have a credit line of $700 billion from taxpayers – more than the Pentagon’s annual budget – to go into financial institutions and buy, hold and ultimately sell troubled assets.
The powers would be for two years, but that could be extended: Treasury Secretary Henry Paulson has said the problems with mortgage loans will most likely last years. And the entire program would be sheltered from court review.
Source: Chronicle news services
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