Treasury’s $700 billion rescue plan for the financial markets stumbled badly in Congress on Tuesday, reflecting growing concern about the huge cost and an angry cultural divide between lawmakers in both parties and the legislation’s principal architects.
Critics deride the idea as Main Street bailing out Wall Street. Proponents speak from an entirely different perspective, casting the massive government intervention as less of a rescue than a novel experiment in “price discovery” that will add not just capital but also vital knowledge to free up frozen credit markets important to the average consumer.
“This is all about the American taxpayer. That’s all we care about,” a frustrated Treasury Secretary Henry Paulson said to snickers at a Senate Banking Committee hearing. The former Goldman Sachs CEO and Federal Reserve Chairman Ben Bernanke endured more than four hours before the committee Tuesday, only to hear Chairman Chris Dodd (D-Conn.) warn that major changes to their plan would be needed “if we are going to get any action on this matter at all.”
Vice President Cheney and White House chief of staff Josh Bolten fared little better before a hostile House Republican conference. And after days of intense activity, Treasury negotiations with the House Financial Services Committee slowed to allow top Democrats to take the political temperature before making final decisions on the package, which is still expected to come to the floor this week.
To rally support, the White House is actively considering a speech to the nation by President Bush prior to House floor debate. And given the anger among voters at home and closeness of November’s elections, the political nervousness among members of both parties is not surprising.
“I don’t think a single call to my office on this proposal has been positive,” Sen. Sherrod Brown (D-Ohio) told Paulson at the Banking committee hearing. Even Democratic Sen. Chuck Schumer, a New Yorker with close ties to Wall Street, urged Paulson to consider scaling back the $700 billion request or accepting an arrangement where the money could become available in tranches after the plan has had time to prove itself.
Amid continued turmoil in the markets, which fell again Tuesday, Paulson said that this would be “a grave mistake,” and that the full sum is needed to signal a real commitment to address the crisis. But both he and Bernanke acknowledged that it will take time to put the elaborate auction mechanisms in place, and Schumer estimated that an initial commitment of $150 billion could be sufficient for the remainder of this year.
“It’s a huge sum of money, even $150 billion,” Schumer said. “And the confidence of the markets will be determined by how well it works initially, not by how much money you have in your pocket.”
Bernanke, a former college professor free of the political liabilities attached to Wall Street, bluntly warned senators of the risks of sending the economy into recession if they backed away at this juncture.
“I never worked in Wall Street,” Bernanke told Dodd. “My interest is solely for the strength and the recovery of the U.S. economy. I believe if the credit markets are not functioning, that jobs will be lost, the unemployment rate will rise, more houses will be foreclosed upon, GDP will contract, that the economy will just not be able to recover in a normal, healthy way, no matter what other policies are taken.”
At the same time, Bernanke, even more than Paulson, warned lawmakers against imposing what he called “punitive” measures that could diminish the willingness of banks and investment companies to participate in the program. And departing from his prepared text, the Fed chairman gave senators a short tutorial that presented the program in a different light from a government bailout.
From his prspective, the real purpose would be to break what Bernanke described as a downward cycle of “fire sale” prices that have infected mortgage-related securities — forcing companies to mark down their value far below what they might be worth if held for maturity.
As a result, the Fed chairman said, private capital is unwilling to come into the market because of this uncertainty, but government purchases and auctions engineered under the Treasury could begin to turn the situation around and shed more light on true values.
“I believe that under the Treasury program, auctions and other mechanisms could be designed that will give the market good information on what the hold for maturity price is for a large class of mortgage related assets,” Bernanke said.
“Banks will have a basis for valuing those assets and not have to use fire sale prices,” he said. “Liquidity would begin to come back to these markets.”
Success, however, depends on drawing the widest possible competition to the bidding process, Bernanke said, and here the chairman and Paulson are both running up against anger among lawmakers and their constituents, who see the $700 billion as a government bailout.
There is strong bipartisan pressure to impose caps on executive pay and severance packages at those firms that benefit from the government purchases. And Sen. Jack Reed (D-R.I.) argued strongly that taxpayers should also be rewarded with some equity interest in the companies so that Treasury might share in future profits.
On the executive compensation issue, Dodd and House Financial Services Committee Chairman Barney Frank (D-Mass.) have said flatly that some caps will have to be in the bill to get political support.
The equity issue is more complicated, but here also both committee chairmen are sympathetic with the arguments by Reed, who has a long friendship with Frank. And to some degree, Bernanke and Paulson have walked into a political box, since they were quite aggressive in demanding an equity interest when the Fed recently intervened to rescue the ailing insurance giant AIG.
Before moving ahead this week, Frank’s committee still has several issues to be decided at a leadership level. Among these is the question of whether the bill will contain language — bitterly opposed by the banking industry — to allow bankruptcy judges to restructure residential mortgages.
But perhaps more important to the large politics of the fight now is some resolution of domestic spending issues still facing Congress before it can go home for the elections. Democrats do not want to help Treasury with its rescue package only to have a veto fight with Bush. And to help spell out the lines, House Appropriations Committee Chairman David Obey (D-Wis.) Tuesday night announced the final details of a long awaited stop-gap spending bill running into next March.
Full-year funding would be provided for the Departments of Defense, Veterans Affairs and Homeland Security, but the bill also includes close to $38 billion in supplemental spending, about two-thirds of which is for disaster aid programs.
Also included is more than $7 billion for Pell Grants for low-income college students and energy assistance for poor families buying fuel this winter. And $7.5 billion is set aside to cover the subsidy costs for $25 billion in direct loans for the auto industry — squeezed by the same credit crunch that is driving Paulson’s own plan.