$700 Billion Is Sought for Wall Street in Massive Bailout

The New York Times

September 21, 2008
By DAVID M. HERSZENHORN

WASHINGTON — The Bush administration on Saturday formally proposed to Congress what could become the largest financial bailout in United States history, requesting unfettered authority for the Treasury Department to buy up to $700 billion in mortgage-related assets.

The proposal, not quite three pages long, was stunning for its stark simplicity. It would raise the national debt ceiling to $11.3 trillion. And it would place no restrictions on the administration other than requiring semiannual reports to Congress, granting the Treasury secretary unprecedented power to buy and resell mortgage debt.

Staff members from Treasury and the House Financial Services and Senate banking committees immediately began meeting on Capitol Hill, where negotiations were likely to be complicated but quick. Democratic Congressional leaders have pledged to approve legislation by the end of this week.

Even as talks got underway, there were signs of how very much in flux the plan remained. The administration was suggesting it might adjust its proposal, to purchase assets from financial institutions based in the United States, to enable foreign firms with United States affiliates to make use of it as well.

The ambitious effort to transfer the bad debts of Wall Street, at least temporarily, into the obligations of American taxpayers, was first put forward by the administration late last week, after a series of bold interventions on behalf of ailing private firms seemed unlikely to prevent a crash of world financial markets.

A $700 billion expenditure on distressed mortgage-related assets would be roughly what the country has spent so far in direct costs on the Iraq war and more than the Pentagon’s total yearly budget appropriation. Divided across the population, it would amount to more than $2,000 for every man, woman and child in the United States.

Whatever is spent will add to a budget deficit already projected at more than $500 billion next year. And it comes on top of the $85 billion government rescue of the insurance giant, American International Group, and a plan to spend up to $200 billion to shore up the mortgage finance giants, Fannie Mae and Freddie Mac.

“This is a big package, because it was a big problem,” President Bush said on Saturday at a news conference at the White House after meeting with President Álvaro Uribe of Colombia. “I will tell our citizens and continue to remind them that the risk of doing nothing far outweighs the risk of the package, and that, over time, we’re going to get a lot of the money back.”

Mr. Bush also sought to portray the plan as benefiting every American. “The government needed to send a clear signal that we understood the instability could ripple throughout and affect the working people and the average family, and we weren’t going to let that happen.”

Key Democratic lawmakers have made clear that they want to include in the legislation at least some assurance that the administration would use its new role, as the owner of large amounts of mortgage debt, to move aggressively to help hundreds of thousands of troubled borrowers at risk of foreclosure.

A program to help refinance mortgages — including an $800 billion increase in the national debt limit — was approved in July. But financing for it largely depended on fees paid by the mortgage finance giants, Fannie Mae and Freddie Mac, which have been placed into a government conservatorship.

Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee, said his staff had already begun working with the Senate banking committee to draft additions to the administration’s proposal.

Mr. Frank said Democrats were particularly intent on limiting the huge pay packages for corporate executives whose firms seek aid under the new plan — raising the prospect of a contentious battle with the White House.

“There are going to be federal tax dollars buying up some of the bad paper,” Mr. Frank said. “They should accept some compensation guidelines, particularly to get rid of the perverse incentives where it’s ‘heads I win, tails I break even.’ ”

Mr. Frank said Congressional leaders were also considering other measures, perhaps including a wider economic stimulus initiative, either as part of the administration’s plan or as part of the budget resolution that Congress must pass before adjourning at the end of the week.

Aides to Speaker Nancy Pelosi and Steny H. Hoyer, Democrat of Maryland, the House majority leader, said they were reviewing the proposal.

Some Congressional Republicans warned Democrats not to overreach. “The administration has put forward a plan to help the American people and it is now incumbent on Congress to work together to solve this crisis,” said Representative John A. Boehner of Ohio, the Republican leader.

Mr. Boehner added: “Efforts to exploit this crisis for political leverage or partisan quid pro quo will only delay the economic stability that families, seniors, and small businesses deserve.”

Senator Charles E. Schumer of New York, who attended emergency meetings with the Treasury secretary, Henry M. Paulson Jr., and the Federal Reserve chairman, Ben S. Bernanke, on Capitol Hill last week, described the proposal as a good start, but said that it did little for regular Americans.

“This is a good foundation of a plan that can stabilize markets quickly,” Mr. Schumer said in a statement. “But it includes no visible protection for taxpayers or homeowners. We look forward to talking to Treasury to see what, if anything, they have in mind in these two areas.”

In Florida, Senator Barack Obama of Illinois, the Democratic presidential nominee, said he would press for a broader economic stimulus initiative to be part of the bailout plan for financial firms.

Aides said Mr. Obama was still reviewing the administration’s proposal. But in Daytona Beach, Fla., he told voters, “We have to make sure that whatever plan our government comes up with works not just for Wall Street, but for Main Street.”

He added: “We have to make sure it helps folks cope with rising prices, and sparks job creation, and helps homeowners stay in their homes. That’s the kind of help folks need right now.”

Senator John McCain of Arizona, the Republican nominee, issued a statement on Saturday saying he was reviewing the administration’s plan. He also urged the administration and lawmakers to consider his own plan for creating a trust within the Treasury Department to aid ailing mortgage lenders and other financial institutions.

“This financial crisis requires leadership and action in order to restore a sound foundation to financial markets, get our economy on its feet, and eliminate this burden on hardworking middle-class Americans,” Mr. McCain said in his statement.

If adopted, the bailout plan would sharply raise the stakes for the new administration on the appointment of a new Treasury secretary.

The administration’s plan would allow the Treasury to hire staff and engage outside firms to help manage its purchases. And officials said that the administration envisioned enlisting several outside firms to help run the effort to buy up mortgage-related assets.

Mindful of a potential political fight, Mr. Paulson and Mr. Bernanke held a series of conference calls with members of Congress on Friday to begin selling them on the proposal, and to assure them that action was needed not just to help Wall Street but everyday Americans as well.

They emphasized that the risk of steep declines in worldwide markets posed a grave risk to all Americans, especially their retirement plans and college savings for children but also their access to consumer credit including auto loans.

Mr. Bernanke, for instance, pointed out that many Americans have savings invested in money market funds, which were at risk of unexpected losses.

It was clear after those conversations that lawmakers were roughly divided into four groups. Republicans most supportive of the administration were in favor of approving the plan as swiftly as possible and with relatively few changes.

Senator Mitch McConnell of Kentucky, the Republican leader, said in a statement: “This proposal is, and should be kept, simple and clear.” He added, “Simply put, now is not the time for partisan plans or pet projects.”

Some Democrats, including lawmakers like Mr. Frank and Senator Christopher J. Dodd, Democrat of Connecticut and the chairman of the banking committee, were adamant about including provisions to promote government action to stabilize real estate prices and help troubled borrowers refinance their mortgages.

Still another group of Democrats was pushing for a wider stimulus package that would direct help more directly and immediately to Main Street, perhaps including an increase in unemployment benefits and investments in infrastructure projects, including bridges and roads, that would help to create jobs.

A fourth, smaller group of lawmakers was highly critical and in some cases adamantly opposed to the plan. That group included including Senator Jim Bunning, Republican of Kentucky, and Senator Bernard Sanders, independent of Vermont.

“The free market for all intents and purposes is dead in America,” Mr. Bunning declared on Friday. “The action proposed today by the Treasury Department will take away the free market and institute socialism in America. The American taxpayer has been misled throughout this economic crisis. The government on all fronts has failed the American people miserably.”

It is far from clear how much distressed debt the government will actually end up purchasing under the plan, though it seemed likely that the $700-billion figure was large enough to send a reassuring message to the jittery markets. There are estimates that firms are carrying up to $1 trillion or more in bad mortgage-related assets.

Lehman Can Sell to Barclays

NEW YORK (AP) — A bankruptcy judge decided just after midnight Saturday that Lehman Brothers can sell its investment banking and trading businesses to Barclays, the first major step to wind down the nation’s fourth-largest investment bank.

United States Bankruptcy Judge James Peck gave his decision in a courtroom packed with lawyers at the end of an eight-hour hearing, which capped a week of financial turmoil.

The deal was said to be worth $1.75 billion earlier in the week but the value was in flux after lawyers announced changes to the terms on Friday. It may now be worth closer to $1.35 billion, which includes the $960 million price tag on Lehman’s Midtown Manhattan office tower.

Lehman Brothers Holdings Inc. filed the biggest bankruptcy in United States history Monday, after Barclays PLC declined to buy the investment bank in its entirety. The British bank will take control of Lehman units that employ about 9,000 employees in the United States.

Jeff Zeleny contributed reporting from Daytona Beach, Fla.; Michael Cooper, Carl Hulse, David Stout and Stephen Labaton contributed.