Monday, September 22, 2008
U.S. Treasury Secretary Henry Paulson wants to become Wesley Mouch. A frightening concept indeed.
Lawmakers Battle over Rescue Plan
Wall Street Journal
WASHINGTON -- Lawmakers are scrambling to put their mark on the Bush administration's $700 billion plan to save financial markets -- a fast-moving test of wills that could reshape one of the biggest bailouts in U.S. history.
There's no sign yet that Congress will delay or derail the proposal. Democrats are looking to add provisions that include beefed-up congressional oversight, aid for individual homeowners and changes to bankruptcy laws.
Some of the measures are opposed by the administration. Perhaps the biggest looming fight is over Democratic efforts to require the program's participants to curb what they pay their executives.
Last week, as deep new fissures opened in global financial markets, the U.S. Treasury unveiled a plan to spend up to $700 billion to buy soured mortgages and mortgage-related securities from financial institutions. In many respects, the financial sector last week all but ceased to function.
In discussions with lawmakers late Sunday, Treasury Secretary Henry Paulson prodded Congress to move forward, voicing worry about how financial markets will react Monday and whether those institutions still standing could be in for more turmoil, officials said. Since unveiling the plan, the administration has kept up pressure for rapid action, in hopes that relieving banks of their troublesome holdings will help lending markets to stabilize.
The bailout is raising thorny questions that could be tough to address as the bill speeds through Congress. Until this proposal, the government's response to the worst financial crisis in 80 years had been led largely by the Treasury and the Federal Reserve, with Congress consulted often only after the fact. As a result, lawmakers view the bailout plan as a chance to reassert their authority. Many are unnerved by Treasury's request for a blank check with few conditions.
The proposal has also stirred a populist backlash, with many members of Congress saying the bill needs to be better geared to Main Street than Wall Street.
"This is not in anyway to deprive [Treasury Secretary Paulson] the opportunity to act. We totally understand the gravity of the moment," said Senate Banking Committee Chairman and Connecticut Democrat Chris Dodd. But, he added: "You cannot just turn over $700 billion of taxpayer money and not insist that that taxpayer is going to be protected in this."
The Treasury's latest draft, sent to Congress on Sunday, could let overseas firms participate. It also leaves the door open for hedge funds to sell distressed assets to the government.
Congress and the Treasury Department appear to be in agreement on the big picture, namely the need and the cost. The differences lie on issues such as what, if anything, the government should extract in return for helping out struggling financial firms.
The Fallout Continues
Mr. Paulson is resisting efforts to limit the pay of executives whose firms participate in the program and plans to fight it "hard," according to a person familiar with the matter. He fears that provision would render the program moot, since many firms might choose not to participate.
There seems willingness to negotiate on other issues, such as how Treasury hires asset managers to oversee the immense investment portfolios it soon could own.
Another likely area for compromise is aid for homeowners. The administration already believes its plan will provide relief to borrowers even though the specific legislative language doesn't address the question. Because Treasury will own mortgage-backed securities and actual home loans, Mr. Paulson said on ABC's "This Week" that the government will be able to exert pressure on mortgage servicers to modify terms.
The debate could expose a peculiar irony in the government's rescue planning, because taxpayers are now both creditors and debtors in the housing mess. While some taxpayers would benefit from attempts to aid homeowners by modifying mortgages or easing the bankruptcy process, others could be hurt if those moves increase the overall cost of the bailout.
The chances of Congress saying "no" to the plan remain slim just weeks from an election, because lawmakers could be reluctant to be tarred with stopping what the Treasury and Fed officials have said is the economy's last best chance.
But among both Democratic and Republican leaders, there's concern that the more populist tilt on Capitol Hill could pose difficulties. The biggest problem is likely to be in the House, where conservative Republicans are uneasy with the size of the bailout and the scope of powers being given to Treasury, while rank-and-file Democrats are calling for fresh assistance for distressed homeowners.
Rep. Jeb Hensarling, a Texas Republican, said there are "widespread concerns" among House conservatives. Mr. Hensarling said most haven't yet taken a public position. But he suggested "a number may very well" oppose the plan. "It's a very, very tough vote," he said. Mr. Hensarling expressed concerns about the cost and scope, but said he is keeping an open mind.
Sen. Richard Shelby of Alabama, the ranking Republican on the Senate Banking Committee, said in a written statement that he "remains at this point unconvinced" as the proposal's merits.
Congress and the White House began negotiations over the weekend, and hope to wrap up a compromise plan late Monday. Rep. Barney Frank, chairman of the House Financial Services Committee, is leading negotiations, with input from Democratic leaders in both the House and the Senate.
Mr. Paulson is scheduled to testify before House and Senate committees on Tuesday and Wednesday. That would set the stage for a vote Thursday in the House and Friday in the Senate.
Negotiations intensified Sunday, when House Democrats presented their own outline of possible legislation to Treasury officials. The Treasury's original proposal, authorizing Mr. Paulson to create a $700 billion fund to buy mortgage-related assets from troubled institutions, was only two-and-a-half pages long. It sent a more detailed plan to Capitol Hill on Sunday.
The Treasury would buy assets through a process to be determined, hold them until the market stabilizes and then sell them back into the private market. That would remove the toxic assets at the root of the current crisis.
Valuing these assets will be one of the trickiest questions. For the plan to succeed, financial institutions must be able to get these assets off their books at a high enough price that their balance sheets aren't further pinched.
The government is, in some respects, constrained in driving a hard bargain because the whole point of the program is to help banks get back on solid footing -- not to force them into deep write-downs, potentially exacerbating their pain. At the same time, the market turmoil has complicated efforts to determine the "real" value of the assets.
The mechanics of any sale are expected to be worked out between the asset managers and the Treasury. One option is a reverse auction. In that case, the Treasury could determine a type of asset it wants to buy (say, all AAA-rated mortgage-backed securities) and would then buy securities from financial institutions that offer to sell at the lowest price.
Congressional officials suggested the plan would create a rolling borrowing authority, with the $700 billion limit acting as a cap. That gives the bailout a potential value that's bigger than the entire annual Pentagon budget.
The proposal also calls for raising the public debt limit to $11.3 trillion. It would be the second time this year that ceiling has been lifted.
Treasury wants broad discretion in the program. If market conditions worsen, for instance, it wants flexibility to buy more or different assets.
Mr. Paulson appeared on four Sunday network television news shows to explain and defend the plan. In an appearance on Fox News Sunday, Mr. Paulson said the bill shouldn't have additional items added onto it. "We want this to be clean and we want this to be quick and it's urgent that we get this done," Mr. Paulson said.
"This is a humbling, humbling time for the United States of America as we go around the world and talk to people about our financial system," he said. "We will work through this."
Regarding executive pay, Rep. Frank's draft would mandate that any company selling assets into the program "meet appropriate standards for executive compensation," including limits on what could be deemed excessive or inappropriate, according to a copy seen by The Wall Street Journal. The government would also have the ability to "claw back" incentive pay that was based on "earnings, gains, or other criteria that are later proven to be inaccurate." Mr. Paulson is resisting those efforts.
The Treasury also seems to be at odds with a proposal being pushed by Sen. Charles Schumer, a Democrat of New York, to give judges leeway to adjust the terms of mortgages that wind up in bankruptcy court. The idea is to use the bankruptcy process to help homeowners avoid foreclosure.
While supported by several senior Democrats, including House Speaker Nancy Pelosi, the measure is controversial among Republicans, who argue that the contracts should be sacrosanct.
No Role, No Authority
One area of likely compromise is the question of oversight. Under the initial Treasury proposal, the administration would make a report to the House and Senate committees on budget, taxes, and financial services within three months, and then report only twice a year thereafter.
Democratic leaders argued over the weekend Congress had effectively no role and no authority to shape the bailout under this plan -- despite putting lawmakers on the hook for votes that could threaten their careers if the bailout later runs into trouble.
Democratic leaders discussed Sunday enhancing oversight by carving out a special monitoring role for the Government Accountability Office, the investigative arm of Congress. The Republican leadership echoed similar wishes for tougher scrutiny, suggesting creation of congressional panel, led by top leaders in both parties, to lead oversight. More regular reports would be required, perhaps monthly.
The Treasury is open to giving Congress more frequent reviews of its program, a person familiar with the matter said.
Democratic presidential candidate Sen. Barack Obama of Illinois stressed the need for taxpayer and homeowner relief to be a part of any Wall Street rescue at a rally on Sunday. Sen. Obama hasn't said whether he would support a measure that didn't include such provisions.
His top economic adviser, Jason Furman, said Sunday that the Illinois senator insisted on "shared responsibility" for any solution. "As we ask taxpayers to take extraordinary measures to protect the financial system, we have to ask the financial system to do its part, especially in regards to CEO compensation and helping homeowners stay in their homes," he said.
Sen. John McCain backs a "very tight, targeted bill" without the Democratic-backed add-ons, said Douglas Holtz-Eakin, the Republican presidential nominee's top economic adviser. "There's a consensus that Congress has to act and has to act quickly," he said. He said the bill should include only provisions that enjoy bipartisan support. Anything else, he said, "will slow it down."