Paulson urges quick action on $700 billion bailout
Tuesday, 23 September 2008

AP, WASHINGTON -- The Bush administration insisted Sunday that Congress must move quickly to approve what one lawmaker called the ''mother of all bailouts'' -- a $700 billion proposal to buy a mountain of bad mortgage debt in an effort to unfreeze the nation's credit markets.

Congressional leaders endorsed the plan's main thrust, saying passage might occur in a matter of days. But they said it must be expanded to include help for people on Main Street as well as the big Wall Street financial firms who have lost billions of dollars through their bad investment decisions.
 
The proposal ''does not include the necessary safeguards,'' said House Speaker Nancy Pelosi, D-Calif. She called for ''independent oversight, protections for homeowners and constraints on excessive executive compensation.''
 
Treasury Secretary Henry Paulson stressed that time was critical to get the proposal passed and that changes to the administration's measure, which was sent to lawmakers on Saturday, could delay that approval, further unsettling global financial markets, which have already seen a number of stomach-churning days as the result of the biggest upheaval on Wall Street since the Great Depression.
 
In yet another indication of how quickly events are moving, the Federal Reserve announced late Sunday that it had granted a request by Goldman Sachs and Morgan Stanley, the country's last two major independent investment banks, to change their status to bank holding companies.
 
The change will allow the two institutions to open commercial banking subsidiaries, greatly bolstering the resources of both institutions.
 
The stock of the two companies had come under pressure as investors began to worry about their future following the bankruptcy last week of investment bank Lehman Brothers and the forced sale of another investment bank, Merrill Lynch, to Bank of America.
 
The administration, which has been scrambling to deal with all the tumult, announced late Sunday that it was modifying a program announced just two days ago to try to bolster the teetering $3 trillion money-market mutual fund industry.
 
On Friday, the government said it would use a $50 billion Treasury fund to provide government guarantees for money-market mutual fund accounts. However, in a significant revision announced late Sunday, the Treasury Department said it would only guarantee funds that were in the accounts as of last Friday, indicating that money deposited after that date would not be guaranteed.
 
The guarantees had been put in place to stem a wave of withdrawals from mutual fund accounts that had been sparked largely by panicked institutional investors.
 
But the banking industry had complained that the new guarantees ran the risk of sparking withdrawals by their savings depositors who might decide to transfer their bank deposits, which are government-insured, to money-market mutual funds, which often pay more in interest than bank savings accounts but up until Friday had not enjoyed any government guarantees.
 
The American Bankers Association praised Treasury's about-face. ''By limiting this new guarantee to funds that existed on or before last Friday, they have eliminated the incentive for people to move money out of bank accounts to seek a higher government guarantee,'' ABA President Edward Yingling said in a statement.
 
In another change, Treasury said that funds deposited in tax-exempt money-market mutual funds as of last Friday would also be covered. Originally, the department had said those funds would not be covered because it might jeopardize their tax-exempt status.
 
In the past two weeks, the government has taken over the country's two biggest mortgage companies, Fannie Mae and Freddie Mac, and its biggest insurance company, American International Group Inc., and stood by while the nation's fourth-largest investment bank, Lehman Brothers, was forced to declare bankruptcy and another investment giant, Merrill Lynch, was forced to sell itself to Bank of America.
 
Paulson and Federal Reserve Chairman Ben Bernanke made the joint decision last week that the only way to stop the carnage was to deal with the root cause of all the troubles, billions of dollars of bad mortgage debt sitting on the books of major financial companies. This debt has triggered the worst credit crisis in decades, causing credit markets to essentially freeze up last week despite the fact that the Fed joined with major central banks around the world to pump billions of dollars of reserves into the financial system.
 
The plan the administration has developed with support from the Fed would have the government buy up to $700 billion of the bad loans, taking them off the books of financial firms with the hope that this will allow those companies to resume normal lending operations. Sen. Richard Shelby of Alabama, the top Republican on the Senate Banking Committee, said the government's efforts would be the ''mother of all bailouts'' that could well cost $1 trillion when the cost of the government takeovers of Fannie, Freddie and AIG were included.
 
Paulson, appearing on four of the five Sunday morning talk shows to sell the plan, insisted that the administration had no choice.

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