The Bush administration sketched out a multi-faceted effort
on Friday to confront the worst U.S. financial crisis in decades,
outlining a program that could cost taxpayers hundreds of billions of
dollars to buy up bad mortgages and other toxic debt that has unhinged
Wall Street.
President Bush, flanked by Treasury Secretary Henry Paulson and Federal
Reserve Chairman Ben Bernanke, acknowledged that the program will put a
"significant amount of taxpayers' money on the line."
The administration is asking Congress to give it sweeping new powers to
execute the plan. Paulson said it "needs to be big enough to make a real
difference and get to the heart of the problem."
Paulson gave few details but said he would work through the weekend with
leaders of Congress from both parties to flesh out the program, the
biggest proposed government intervention in financial markets since the
Great Depression. Members of the Senate Banking Committee said they had
yet to receive details of the proposal, but were ready to move quickly
when they do.
The government's steps were welcomed by financial markets. As Paulson
spoke, the Dow Jones industrials were up over 300 points and at one
point had soared by 450 points. Global stock markets rose, too.
Before the markets opened, the government announced plans to temporarily
insure money-market deposits and to block short-selling in financial
securities. Short selling is a trading method that bets the stocks will
go down.
Speaking to reporters at the Treasury Department, Paulson said that the
new troubled-asset relief program that he wants Congress to enact must
be large enough to have the necessary impact while protecting taxpayers
as much as possible.
"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,"
Paulson said in a prepared statement.
"The financial security of all Americans ... depends on our ability to
restore our financial institutions to a sound footing," he said.
Paulson said mortgage giants Fannie Mae and Freddie Mac will step up
their purchases of mortgage-backed securities to help provide support to
the crippled housing market.
He also said the Treasury Department will expand a program, announced
earlier this month, to buy mortgage-backed securities, which have been
badly hurt by the housing and credit crises.
"As we all know, lax lending practices earlier this decade led to
irresponsible lending and irresponsible borrowing. This simply put too
many families into mortgages they could not afford," Paulson said.
At a news conference in which he only took three questions, Paulson was
asked the approximate dollar size of the government intervention. "We're
talking hundreds of billions," he said.
Paulson did not address specifics about the plan to buy back bad debt or
whether the government would take a direct stake in troubled banks in
exchange for its help.
"These illiquid assets are clogging up our financial system, and
undermining the strength of our otherwise sound financial institutions.
As a result, Americans' personal savings are threatened, and the ability
of consumers and businesses to borrow and finance spending, investment,
and job creation has been disrupted," Paulson said.
He said that the administration would present Congress with a proposed
legislative package and then work with lawmakers "to flesh out the
details through the weekend. And we're going to be asking them to take
action on legislation next week."
"This is what we need to do. Because for some time we've been saying
that the root cause of the problems in our economy and our financial
system is housing, and until we get stability in the housing market we
are not going to get stability in our financial markets," he said.
Earlier, Bush authorized Treasury to tap up to $50 billion from a
Depression-era fund to insure the holdings of eligible money market
mutual funds. And the Federal Reserve announced it will expand its
emergency lending program to help support the $2 trillion in assets of
the funds.
Both moves are designed to bolster the huge money market mutual fund
industry, which has come under stress in recent days.
The Fed said it is expanding its emergency lending efforts to allow
commercial banks to finance purchases of asset-backed paper from money
market funds, which should help the funds meet demands for redemptions.
The Securities and Exchange Commission early Friday imposed a temporary
emergency ban on short-selling, which had been contributing to the
collapse of stock values of investment and commercial banks.
Congressional leaders said they expected to get the rescue plan Friday
and act on it before Congress recesses for the election.
The government's actions could help alleviate the uncertainty that has
been sending the markets into tumult over the past week. Lending has
come to a virtual standstill in the wake of the bankruptcy of Lehman
Brothers Holdings Inc.
European Central Bank, Swiss National Bank and Bank of England also
offered up more cash Friday. The three banks put a combined $90 billion
into money markets in a lockstep move.
The chairman of the Senate Banking Committee, Chris Dodd, D-Conn.,
warned on ABC's "Good Morning America" Friday that the United States
could be "days away from a complete meltdown of our financial system"
and said Congress would work quickly to prevent that.
Later Dodd told reporters that the government's rescue plan will be
costly, and demanded more details. "We're anxious to hear the specifics.
None of us have any idea what the details are. We understand the gravity
of the moment," he said. predicted the new bailout plan would cost at
least half a trillion dollars.
Paulson said he wanted action next week by Congress.
"Time is of the essence," House Speaker Nancy Pelosi, D-Calif., said
Thursday night after being briefed by Paulson and Bernanke.
Rep. Roy Blunt, the No. 2 GOP leader in the House, suggested the rescue
can be handled without a tax increase.
"It doesn't necessarily have to be something that impacts taxpayers in a
negative way," said Blunt, R-Mo. "It all depends on how you put that
structure together."
GOP presidential candidate John McCain said any action should "be
designed to keep people in their homes and safeguard the life savings of
all Americans."
Democratic rival Barack Obama said it is critical that leaders in both
parties work in concert. "Truly we are all in this together," he said.
The federal government already has pledged more than $600 billion in the
past year to bail out, or help bail out, some of the biggest names in
American finance.
