By Alison Fitzgerald and John Brinsley | The Bush administration asked Congress for unchecked power to buy $700 billion in bad mortgage investments from U.S. financial companies in what would be an unprecedented government intrusion into the markets.
The plan, designed by Treasury Secretary Henry Paulson, is aimed at averting a credit freeze that would bring the financial system and economic growth to a standstill. The bill would bar courts from reviewing actions taken under its authority.
“It sounds like Paulson is asking to be a financial dictator, for a limited period of time,” said historian John Steele Gordon, author of “Hamilton’s Blessing,” a chronicle of the national debt. “This is a much-needed declaration of power for the Treasury secretary. We can’t wait until the next administration in January.”
As congressional aides and officials scrutinized the proposal, the Treasury late today clarified the types of assets it would purchase. Paulson would have authority to buy home loans, mortgage-backed securities, commercial mortgage-related assets and, after consultation with the Federal Reserve chairman, “other assets, as deemed necessary to effectively stabilize financial markets,” the Treasury said in a statement.
The Treasury would also have discretion, after discussions with the Fed, to make non-U.S. financial institutions eligible under the program.
Bigger Than Pentagon
The plan would raise the ceiling on the national debt and spend as much as the combined annual budgets of the Departments of Defense, Education and Health and Human Services. Paulson is asking for the power to hire asset managers and award contracts to private companies. Most provisions of the proposal expire after two years from the date of enactment.
A failure by the government to support the U.S. financial system could lead to “a depression,” Senator Charles Schumer told reporters in New York. “To do nothing is to risk the kind of economic downturn this country hasn’t seen in 60 years.”
The Treasury is seeking authority to step in as buyer of last resort for mortgage-linked assets that few other financial institutions in the world want to buy, following government takeovers of mortgage giants Fannie Mae and Freddie Mac and insurer American International Group Inc.
“Democrats will work with the administration to ensure that our response to events in the financial markets is swift,” House Speaker Nancy Pelosi said in a statement.
The majority party will seek to reduce mortgage foreclosures and create “fast-track authority” for an overhaul of financial regulation, Pelosi said. Democrats will ensure “the government is accountable to the taxpayers in any future actions under this broad grant of authority, implementing strong oversight mechanisms.”
Democrats also will include a plan to stem foreclosures, which may involve tapping the loan-modification abilities of the Federal Housing Administration, the Federal Deposit Insurance Corp., and Freddie Mac and Fannie Mae, Adamske said. Frank, a Democrat from Massachusetts, is chairman of the House Financial Services Committee.
“The consequences of inaction could be catastrophic,” Senate Majority Leader Harry Reid said in a statement.
“While the Bush proposal raises some serious issues, we need to resolve them quickly,” he said. “I am confident that, working together, we will.”
House minority leader John Boehner, an Ohio Republican, said today he is reviewing the proposal but didn’t say whether he was inclined to support it.
“The American people are furious that we’re in this situation, and so am I,” Boehner said in a statement. “We need to do everything possible to protect the taxpayers from the consequences of a broken Washington.”
Congress, which may pass legislation as soon as Friday, needs to “make sure there are protections built in for taxpayers,” said Schumer, a New York Democrat on the banking committee. Lawmakers should ensure “taxpayers who gave the money will be put ahead of the stockholders, bondholders and others.”
Paulson is seeking an expansion of federal influence over markets that hasn’t been seen since the Great Depression, said Charles Geisst, author of “100 Years of Wall Street” and a finance professor at Manhattan College in New York.
Geisst likened the plan to the Reconstruction Finance Corp., which was chartered by Herbert Hoover in 1932 with the goal of boosting economic activity by lending money after credit markets seized up.
President George W. Bush said he called leaders in both houses of Congress and “found a common understanding of how severe the problem is and how necessary it is to get something done quickly.”
“This is going to be a big package because it’s a big problem,” Bush said following a meeting with Colombian President Alvaro Uribe at the White House. “We need to get this done quickly, and the cleaner the better.”
Democratic presidential nominee Barack Obama said in a radio address that he “fully supports” Paulson and Fed Chairman Ben S. Bernanke‘s efforts to stabilize the financial system. The plan, however, should benefit both main street and Wall Street, he said.
Republican Presidential nominee John McCain “looks forward” to reviewing the proposal while focusing at least in part on “minimizing the burden on the taxpayer,” said Jill Hazelbaker, communications director for the McCain campaign.
Ban Legal Challenges
The ban on legal challenges of actions by Treasury is “distasteful, it’s unfortunate and it’s bad precedent, but this is an emergency and you have to act,” said Jerry Markham, a law professor at Florida State University and author of “A Financial History of the United States.”
“What you don’t want happen is to have lawsuits that will slow things down and cause problems,” he said.
The proposal would raise the nation’s debt ceiling to $11.315 trillion from $10.615 trillion and require the Treasury secretary to report back to Congress three months after Treasury first uses its new powers, and then semiannually after that.
Paulson would gain discretion to act as he “deems necessary” to hire people, enter into contracts and issue regulations related to a revival of U.S. mortgage finance, according to a three-page proposal. The Treasury would “take into consideration” protecting taxpayers and promoting market stability.
The Treasury plans to hire managers to purchase the assets through so-called reverse auctions, seeking the lowest prices, a person briefed on the proposal said yesterday. The document specifies that Treasury may buy only assets from U.S.-based financial institutions issued or originated on or before Sept. 17.
The House will pass legislation to implement the plan by the end of next week, and the Senate will act soon after, Frank said yesterday in an interview on Bloomberg Television’s “Political Capital with Al Hunt.”
Bush today said he’s unconcerned that the price tag on the package may seem high.
“I’m sure there are some of my friends out there that are saying, I thought this guy was a market guy, what happened to him,” the president said. “My first instinct was to let the market work, until I realized, while being briefed by the experts, how significant this problem became.”
The Bush administration seeks “dictatorial power unreviewable by the third branch of government, the courts, to try to resolve the crisis,” said Frank Razzano, a former assistant chief trial attorney at the Securities and Exchange Commission now at Pepper Hamilton LLP in Washington. “We are taking a huge leap of faith.”