Unveiling its plan to rescue the nation's financial system from near-paralysis, the Bush administration is asking Congress for the authority to spend $700 billion and for powers to intervene in the economy so sweeping that they have virtually no precedent in U.S. history.
The proposal, set out in a spare 2 1/2 -page document sent to congressional leaders Saturday, would in effect allow the Treasury secretary to set up a government investment bank to buy up the billions of dollars of the mortgage-backed securities now clogging the arteries of the global financial system.
The dollar figure alone is remarkable, amounting to 5% of the nation's gross domestic product. But the most distinctive -- and potentially most controversial -- element of the plan is the extent to which it would allow Treasury to act unilaterally: Its decisions could not be reviewed by any court or administrative body and, once the emergency legislation was approved, the administration could raise the $700 billion through government borrowing and would not be subject to Congress' traditional power of the purse.
"Nothing quite of this scale has happened since the early years of the country when Alexander Hamilton wrote the Treasury act to give him the power to borrow and intervene in markets," said New York University financial historian Richard Sylla. And in Hamilton's case, Congress quickly clipped his wings, and no successor -- not even under President Franklin D. Roosevelt at the height of the Depression -- exercised quite such unfettered power again.
"It essentially creates an economic czar with no administrative oversight, no legal review, no legislative review. And it gives one man $700 billion to disperse as he needs fit," said Sen. Dianne Feinstein (D-Calif.), referring to Treasury Secretary Henry M. Paulson.
"He will have complete, unbridled authority subject to no law," she said.
The proposal, which contains none of the measures Democrats have sought to help homeowners facing foreclosure, set the stage for a major struggle between the administration and the Democratic Congress.
The confrontation is likely to be all the more intense because it will occur against a background of the approaching elections and fears of how shaky financial markets might react to any delay in the rescue.
Reflecting the urgency of the situation and its sensitivity, members of Congress took a cautious approach to the details Saturday but pledged to act on the crisis-fighting measure in 10 or days or fewer.
"This is a good foundation that can stabilize our markets quickly. Make no mistake about it. Nothing should slow this down," Sen. Charles E. Schumer (D-N.Y.) said.
But House Speaker Nancy Pelosi (D-San Francisco), speaking after an hourlong phone conference with fellow Democrats, made clear that they were not prepared to abandon their proposals to broaden the scope of the plan to include help for homeowners and others, as well as at least some regulatory provisions to prevent a repeat of the crisis.
"We will strengthen the proposal by ensuring that the government is accountable to the taxpayers . . . implementing strong oversight mechanisms and establishing fast-track authority for the Congress to act on responsible regulatory reform," she said, and "protect lower- and middle-income Americans, who need to be protected from the fallout of the ongoing Wall Street crisis by enacting an economic recovery package."
Such a package would add considerably to the already gargantuan costs of the plan and would come on top of the more than $100 billion in tax rebates sent this year at the administration's request.
Some conservative Republicans also expressed unhappiness. Rep. Mike Pence (R-Ind.) said, "Our financial markets are in turmoil and the administration was right to call for decisive action to prevent further harm to our economy, but nationalizing every bad mortgage in America is not the answer."
In forwarding his proposal to Congress, Paulson made good on his promise of "bold" steps to end the yearlong crisis that has sunk some of the nation's biggest financial powerhouses, created turmoil on Wall Street and pushed the struggling economy closer to recession.
And he in effect acknowledged that his previous ad hoc efforts and those of Federal Reserve Chairman Ben S. Bernanke to contain the debacle had failed.
The Paulson plan would give the Treasury secretary spectacularly wide leeway to buy, manage and sell mortgages and mortgage-related securities with the aim, in the words of the proposal, of "providing stability or preventing disruption to the financial markets or banking system" and "protecting the taxpayer."
The only limitations would be that Treasury's stock of troubled assets could not total more than $700 billion at any one time, that the buying program would end after two years, and that Paulson or his successor would regularly report to Congress. Moreover, though the proposal says Treasury's new authority would expire after two years, the history of past grants of emergency power suggests that Congress finds it hard not to renew them.
For the rest, the Treasury secretary would be free to do what he "deems necessary."
The plan would boost the public debt limit, now $10.6 trillion, to $11.3 trillion. Treasury could purchase the mortgage-backed assets of only U.S.-headquartered firms, a move that seems likely to anger foreign investors who have been among the major buyers of American financial instruments. With Bernanke's assent, Paulson could widen eligibility.
Paulson and key aides both in and out of government have reportedly been working on the plan to make the government the buyer of last resort for several weeks, having concluded that Washington's effort to fight one financial brush fire after another was failing.
But they were reluctant to share the idea with Congress until the dimensions of the crisis ballooned. In the last two weeks alone, the government has taken over mortgage finance giants Fannie Mae and Freddie Mac and insurer American International Group Inc.
It also tried but failed to orchestrate a private bailout of investment bank Lehman Bros. Holdings Inc., which has declared bankruptcy, and has watched as Merrill Lynch & Co. rushed to sell itself to Bank of America Corp.
In addition, Treasury sought to stanch a run on the nation's $3.4 trillion worth of money market mutual funds by offering to protect their holders against loss in a manner similar to the way Washington protects bank depositors.
Meantime, the Federal Reserve launched a drive to stabilize the financial system by making hundreds of billions of dollars in loans against increasingly risky assets, and buying some types of securities outright.
Even so, all of these efforts appeared to be failing as of the middle of last week as major banks stopped making even the most conservative, short-term loans to one another -- a move that, if allowed to continue, could have plunged the country into deep and abrupt depression.
The language of the new plan suggests that Paulson intends to set up an investment bank inside Treasury and perhaps hire outside firms such as Goldman Sachs Group Inc., which he headed before becoming Treasury secretary.
The plan would give him the power not only to buy troubled instruments, but also engage in the kind of complex financial transactions performed by investment banks "in regard to any mortgage-related asset purchased under this act."
"It's analogous to saying, 'We need $700 billion to fight a war. We'll tell you later how we're going to fight it,' " Douglas W. Elmendorf, a former Fed economist now at the Brookings Institution, said of the proposal.
The most complicated step in Treasury's effort -- and one about which the plan sent to Congress gives no specifics -- is how Treasury will go about buying the troubled assets at the center of the crisis.
That turns out to be more complicated than it might first appear, because the very reason these assets are causing so much trouble is that nobody wants to buy them, so no one knows how much they are worth or what their prices should be.
Lawmakers who have discussed the matter with Paulson said he intended to tackle this problem by conducting a series of so-called reverse auctions.
In a reverse auction, the government would announce that it would buy, say, $50 billion of a certain type of troubled asset. Firms with that asset would make bids by offering to sell the securities for a certain price. The government would start buying from those making the lowest bids and work its way up the list until it had spent the $50 billion. Owners of the securities would have an incentive to price them relatively low to increase the chances that Treasury would buy them.
Analysts said this technique could help end the current crisis in two ways: By getting troubled assets off the books of some firms, it would allow them to go back to doing business as usual. Additionally, it would help firms that didn't sell know where they stand financially by in effect setting a price for assets for which it is now impossible to determine a value.
But Treasury officials are almost certain to find themselves on the horns of a dilemma, and how they resolve it may decide whether the government, and taxpayers, recoup their money or take a financial bath.
The problem is this: The quality of mortgage assets varies all over the map even within very narrowly defined classes of the financial instruments that Washington will need to buy to end the crisis
"That means that if the classes are defined broadly, the Treasury will end up with the lowest-quality assets, driving up its fiscal cost," Jan Hatzius, chief U.S. economist for Goldman Sachs, wrote in a note to clients.
On the other hand, Hatzius said, "if the classes are defined narrowly, only a few institutions will own the asset in question and there may not be enough bidders for an auction."