Federal rescue plan takes shape
Federal regulators rolled out the first pieces of their sweeping plan to end the nation’s financial crisis Friday, moving to insure up to $2 trillion in money market mutual funds and temporarily barring investors from betting on the decline of financial company stocks.
The moves came as lawmakers awaited the keystone of the new panic-fighting plan -- the proposal for a federal takeover of the troubled mortgage assets that now clog the books of banks and securities firms.
Exactly how the takeover would be accomplished -- and at what potential cost to taxpayers -- is still being worked out inside the Bush administration. Concerns were raised Friday, however, by Republicans anxious about the price tag and by Democrats who fear that the rescue plan would favor highflying financiers over ordinary Americans.
Still, expectations for a comprehensive rescue plan led to a strong rally on Wall Street for a second straight day, with the Dow Jones industrial average posting its biggest back-to-back point gains in more than eight years.
“This is a pivotal moment for America’s economy,” President Bush said during a brief appearance in the White House Rose Garden. “We must act now to protect our nation’s economic health from serious risk. There will be ample opportunity to debate the origins of this problem. Now is the time to solve it.”
The chief architects of the latest effort, Treasury Secretary Henry M. Paulson and Federal Reserve Chairman Ben S. Bernanke, gave new hints about the dimensions of their proposal, which would probably be the largest government intervention in the financial markets since the 1930s.
“We’re talking hundreds of billions,” Paulson told a morning news conference. “This needs to be big enough to make a real difference and get at the heart of the problem.”
The two men spent much of their day on the phone pleading for speedy action by Congress on their “bad asset” plan, and lawmakers who spoke with them said the pair presented a sobering picture of just how fragile financial markets have become.
“All of us are prepared to do whatever we can this weekend . . . to fashion a proposal that will get us out of this mess,” said Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee, who was expected to shepherd the plan through the Senate. “We understand the gravity of the moment.”
Beneath the surface, however, questions about the administration’s approach began to be voiced among members of Congress, as well as outside analysts. And, with the Nov. 4 presidential election only weeks away, political tensions inevitably arose as well.
On Capitol Hill, conservative Republicans denounced the administration’s move away from free-market principles.
“At this point, Congress is being asked to support an uncertain entity, costing an uncertain amount of dollars, for an uncertain duration -- a decision that will have implications for generations to come and requires absolute certainty,” said Rep. Jeb Hensarling (R-Texas), a leader of House conservatives.
“My fear is that taxpayers will be left with the mother of all debts.”
Meanwhile, Democrats complained that the White House was offering too much help to financial companies that bet big on risky mortgage investments, and not enough to people losing their homes to foreclosure.
They expressed special irritation with what they described as Paulson’s insistence that Congress approve the administration proposal “clean,” without any aid for troubled homeowners or regulations aimed at preventing a repeat of the current disaster.
“It’s got to be done right away, but they won’t make any concessions in order to get it to happen,” said Rep. Brad Sherman (D-Sherman Oaks), who sits on the House Financial Services Committee.
“They are playing Russian roulette in the hopes that if the economy gets shot, the Democrats get blamed,” Sherman said.
Even policy analysts who are generally not averse to government intervention in the economy seemed taken aback by the apparent scale and aggressiveness of what the administration and the Fed have in mind. Robert E. Litan, an ex-Clinton administration Treasury official who is now a senior analyst with the Brookings Institution, said the new plan seemed to invite banks and securities firms to dump their very worst assets on the government with no clear way for Washington to get rid of them.
“What they’re going to get is the financial equivalent of radioactive waste,” he warned.
Earlier in the week, the Dow Jones industrial average fell to its lowest level in almost three years as giant financial institutions teetered on the verge of collapse and global credit markets seized up as banks hoarded their cash.
Financial markets began recovering Thursday, when federal officials expressed support for a comprehensive plan to defuse the crisis.
On Friday, the Treasury Department announced a $50-billion program to stabilize the nation’s money market mutual funds, which traditionally have been among the safest investments available to individuals and institutions but had begun to show cracks as the financial crisis deepened.
Treasury staffers briefing reporters on background said Washington was offering to insure funds containing $2 trillion of investment -- or about as much again as the government insures in bank deposits -- to stanch a run on the funds as investors sought still safer places for their money.
Officials said funds would have to pay a fee for the insurance and that the program was envisioned to last only one year. They said that, unlike federal insurance for bank deposits, which covers up to $100,000, the money market insurance would cover unlimited amounts.
“Concerns about the net asset value of money market funds falling . . . have exacerbated global financial market turmoil and caused severe liquidity strains,” the Treasury Department said.
Separately, the Securities and Exchange Commission issued an emergency order barring traders from “selling short” the shares of 799 financial stocks for at least 30 days.
Short selling is the practice of borrowing shares of a company and then selling them in hopes that their value will fall. When that happens, short sellers buy the shares back at a lower price to repay the loan, reaping a profit.
Financial companies loaded with bad debt had become prime targets for short sellers and the SEC said it had become concerned that the practice “may be causing sudden and excessive fluctuations of the prices of such securities in such a manner so as to threaten fair and orderly markets.”
Also Friday, the Fed took another step away from its traditional mission of looking after the nation’s banks by announcing that it would engage in new lending and purchases aimed at propping up the value of asset-backed commercial paper and the short-term debt of such entities as mortgage giants Fannie Mae and Freddie Mac. Both are widely owned by money market mutual funds.
Fed officials said the program could involve up to $300 billion in additional lending and purchases.
Much of Washington spent Friday trying to coax out tidbits about what the new “bad assets” plan would look like from lawmakers and administration officials.
Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, said the proposal was most likely to grant the Treasury the authority to buy up bad debt, and not create a stand-alone agency along the lines of the Resolution Trust Corp., which was formed in 1989 to sell off the assets of failed savings and loans. The primary reason, he said, is that the Treasury could move more quickly to snap up troubled assets.
“What we’re talking about now is the Treasury Department probably buying up paper, securities, bad debt,” Frank said in an interview on C-SPAN. “There’s not as much need for a separate entity, and there’s the speed factor.”
White House Economic Council Director Keith Hennessey said the administration was not using the RTC as its model.
“The RTC was an organization that was buying assets or taking assets and disposing of them from institutions after they had failed,” Hennessey said at a White House news conference. “What we’re talking about here is institutions which are still operating and going in and providing liquidity to their bad assets on their balance sheet.”
In return for giving the administration permission to buy assets, Democrats pressed Paulson and Bernanke to agree to support programs that would more directly benefit consumers and taxpayers.
“What do the taxpayers get in return?” asked Sen. Robert Menendez (D-N.J.). “The proposal could result in the most direct commitment of taxpayer funds that our country has seen. There has to be a balance, a fair trade-off, and taxpayer protections.”
Among other items on the Democrats’ wish list: a second stimulus package that would feature new unemployment benefits, increased energy assistance and spending on infrastructure projects.
But most important, Dodd said, would be measures to curb the rising number of foreclosures, such as requiring lenders to write down the principal balance on mortgages of homeowners who owe more than their house is now worth.
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maura.reynolds@latimes.com
richard.simon@latimes.com
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Daily developments
* The government says it will purchase hundreds of billions of dollars of bad debt from troubled banks.
* In a highly controversial move, U.S. regulators put a temporary ban on short selling -- a strategy to profit from falling share prices -- in 799 financial stocks.
* The government takes the unprecedented step of insuring individual investors against losses in money market mutual funds.
* To spur the housing market, finance giants Fannie Mae and Freddie Mac as well as the Treasury Department will quickly expand purchases of mortgage-related securities.
* The Dow Jones industrial average jumps 3.4%.
