Saying the nation’s economy is on the line, congressional leaders are pushing for a vote today on a $700-billion plan to end the financial system’s paralysis and protect taxpayers from having to bear the cost.
The 110-page bill that goes to a House vote today and a Senate vote as soon as Wednesday contains key measures demanded by both parties. Among them: curbs on executive pay, an oversight board and a chance for taxpayers to share in potential gains.
“No longer will the U.S. taxpayer bail out the recklessness of Wall Street,” said House Speaker Nancy Pelosi (D-San Francisco).
The plan builds on the Bush administration’s original three-page proposal to buy up securities tied to troubled home loans. The huge losses from these securities have brought the financial system to its knees -- pushing giant investment banks into collapse, making credit harder to obtain and roiling global markets.
Still, despite the endorsement of the leaders of both parties, the deal faces strong opposition, and it remained unclear Sunday whether it would have enough votes to pass.
At the center of the rescue plan are two programs designed to buy up and establish prices for the mortgage-backed assets. One program would permit the government to purchase the troubled securities and hold them until they regain value, and the second would set up a government insurance program to guarantee the value of some assets.
Lawmakers worked hard to dispel the popular impression that the plan would rescue wealthy financiers who made fortunes pushing tricky investment schemes and stick ordinary Americans with the bill.
“You’ve heard all this hyperbole . . . that we’re throwing $700 billion at Wall Street. That simply isn’t true,” said Sen. Judd Gregg (R-N.H.), the top Republican on the Senate Budget Committee and one of his party’s lead negotiators. “We may lose some money, we may break even or we may make some money. My gut tells me we’ll make money.”
Presidential nominees Sen. Barack Obama (D-Ill.) and Sen. John McCain (R-Ariz.) both tentatively endorsed the plan in appearances on Sunday news programs.
“This is something that all of us will swallow hard and go forward with,” McCain said on ABC’s “This Week.” “The option of doing nothing is simply not an acceptable option.”
"[If] this is not going to be welfare for Wall Street, then my inclination is to support it because I think Main Street is now at stake,” Obama said on CBS’ “Face the Nation.” “This could affect every sector of the economy.”
At least some House Republicans who protested the plan last week expressed reluctant support after negotiators incorporated their demand for an insurance program as well as a purchase program.
“More and more people are coming around to it,” Rep. James T. Walsh (R-N.Y.) said as he left a closed-door debate among his colleagues. “It’s not a pretty option, but it’s the best option.”
At a Democratic “skeptics” caucus, Rep. Brad Sherman (D-Sherman Oaks) described the attitudes as ranging from “hold your nose and vote yes, to vote no, to scream no.”
“If it’s take it or leave it, we should leave it and try again,” said Rep. Dennis J. Kucinich (D-Ohio), one of about 30 Democratic lawmakers who filed into a basement to hear economists critique the proposal.
Lynn Turner, the former chief accountant of the Securities and Exchange Commission, was also critical.
“History will be the judge of whether this bet by Congress pays off or not,” he said. “But given how high the stakes are, and the huge risk America faces, this was an extremely poorly made piece of sausage, and with everything that is in it, Americans may find it not very pleasant-tasting in the long run.”
Pelosi went to great lengths to insist that the bill was neither a Democratic nor Republican product but a compromise that would draw opposition from both sides. She expressed hope, however, that enough members of both parties would vote for it to make it law within days.
“This is a bill that was sent by the president, improved by the Congress in a bipartisan way, and we will have to have bipartisanship to pass it,” Pelosi said.
As the evening progressed, there were signs she was getting just that. Republican leaders emerged from a three-hour meeting with their caucus to tout the bailout, saying it had undergone a “giant improvement” thanks to their contributions.
“At the end of the day, there really are no taxpayer funds at risk here,” said House Minority Leader Rep. John A. Boehner (R-Ohio), referring specifically to the insurance plan. “What is at risk is the U.S. economy. And that’s why we’re supporting this bill.”
The bipartisan support is expected to be well-received on Wall Street, though the package comes with more strings attached than the financial industry would like. Approval should also spell relief for the credit markets, which had congealed in the last two weeks as anxious banks hoarded cash and rates on normally routine short-term loans skyrocketed.
The bailout could even morph into a huge payday for the handful of Wall Street firms that have largely sidestepped the mortgage crisis, if they are hired by the Treasury Department to manage assets bought from troubled banks.
In electronic trading early this morning, U.S. stock index futures were down, suggesting that Wall Street would decline when trading opened.
Asian markets fell as investors apparently remained unconvinced that there would be a quick turnaround.
However, it’s not clear how passage would affect the mortgage market and the broader economy. And a relaxation of the credit markets and banks’ willingness to lend could come slowly until the tangible effects of the plan become apparent.
“Wall Street will be relieved that the uncertainty surrounding the bailout appears to be eliminated,” said Martin Fridson, head of Fridson Investment Advisors in New York. “But unfortunately, many other uncertainties remain.”
Major provisions of the rescue plan include:
* Authorizing the secretary of the Treasury to spend up to $700 billion to purchase and/or insure troubled mortgage-backed securities that are currently not being traded.
The central premise is that by buying the untradeable assets, or agreeing to an insured value for them, the government will help set prices that will permit financial institutions to know what their assets are worth.
Under the insurance program, premiums would be paid by the companies that sought the insurance, which Republicans argued would reduce the amount of taxpayer money needed for the purchase program.
* Issuing the $700 billion in installments. The first installment of $250 billion would be given to the Treasury secretary immediately. The next installment of $100 billion could be released by the president. The last installment of $350 billion could be issued if the president requests it and Congress does not act to halt it by passing a joint resolution.
* Requiring the president to assess the costs of the program after five years and to submit legislation that would require financial firms to cover any losses to taxpayers.
* Requiring a company whose assets are purchased under the program to also provide the government with stock or other financial instruments to enable the government to cash in profits if and when the firm recovers. Proceeds would go to pay down the public debt.
* Ending “golden parachute” payouts to the top five executive officers of companies that take part in the program. However, the provision would not be retroactive and would apply to payments made after the bill is enacted.
* Limiting the compensation of executives of participating companies and reducing how much of their pay is tax-deductible.
* Setting up an oversight board to supervise the program that includes the chairmen of the Federal Reserve and Securities and Exchange Commission, the secretary of Housing and Urban Development and the director of the Federal Home Finance Agency.
* Establishing a special inspector general to audit the programs.
The rescue sets out broad principles for how the plan should work -- for instance, that the government should push for modification of the troubled mortgages underlying the securities -- but leaves the details of implementation largely up to the Treasury secretary.
For instance, the legislation simply grants Treasury Secretary Henry M. Paulson authority to “purchase and to make and fund commitments to purchase troubled assets from any financial institution on such terms and conditions as are determined by the secretary.”
Paulson has said he intends to organize an auction process to help set prices for the securities. He said the firms would submit bids to sell assets at various prices, and the Treasury would decide which assets to choose. But under the legislation, he has the right to use any criteria to set prices and make purchases.
A central reason is that the goal of the bailout is not to rescue individual firms but to restart the moribund financial markets. That means would-be sellers would not be able to unload all the assets they’d like. And as the true value of some assets becomes clearer, more firms may fail.
But in a statement late in the day, President Bush stressed that the focus is not the fate of individual companies but the entire financial system.
“This bill provides the necessary tools and funding to help protect our economy against a system-wide breakdown,” Bush said. “The bill will help allow access to credit so American families can meet their daily needs and American businesses can make purchases, ship goods, and meet their payrolls. And this plan sends a strong signal to markets around the world that the United States is serious about restoring confidence and stability to our financial system. Without this rescue plan, the costs to the American economy could be disastrous.”
The full text of the rescue plan is available on the website of the House Financial Services Committee: financialservices.house.gov.
Times staff writers Walter Hamilton in New York and Tom Hamburger in Washington contributed to this report.
(BEGIN TEXT OF INFOBOX)
The 110-page Emergency Economic Stabilization Act of 2008 -- and the $700 billion that goes with it -- was designed to “restore liquidity and stability to the financial system” and to protect U.S. homeownership and other personal investments. The key elements:
Provides as much as $700 billion to the U.S. Treasury, including an immediate payment of $250 billion. If needed, there would be additional payments of $100 billion and $350 billion, with the last payment subject to congressional approval.
The Treasury would create a program to buy distressed mortgage-related investments and other troubled assets from cash-strapped banks and financial institutions. The aim is to free the companies to resume raising money and lending.
Creates a program allowing banks to buy government insurance to cover the value of certain troubled assets instead of selling them to the government.
* Taxpayers would get a slice of ownership in financial institutions that sell their devalued assets to the government. If the companies involved subsequently thrive, the taxpayers would benefit.
* If the taxpayer outlays under the program are not recouped after five years, the president must come up with a plan, to be funded by financial institutions, to cover the costs.
* Requires the Treasury to modify troubled mortgages purchased or controlled through the bailout program wherever possible, and to encourage loan servicers to modify loans through HOPE for Homeowners and other U.S. assistance programs.
* Allows the Treasury to use loan guarantees and credit fixes to stem foreclosures, and expands eligibility for HOPE for Homeowners.
* Requires the Treasury to coordinate with other U.S. agencies that hold troubled assets to modify mortgages.
Executive pay and other measures
* Requires companies that participate in the bailout program to pay excise taxes, forgo certain tax benefits and, in certain cases, to limit incentives, executive pay and the compensation paid to departing executives. It would require unearned bonuses to be returned, if applicable.
* Automatically ends the asset purchasing program on Dec. 31, 2009, but can be extended another year.
* Requires profits from the sale of troubled assets to be applied to the national debt.
* Creates a multi-department Financial Stability Oversight Board within the U.S. government; creates a congressional oversight panel to review bailout-related issues; creates the Office of the Special Inspector General to oversee and report on the asset purchasing program; and requires periodic cost estimates from other government agencies.
* Requires the Treasury to publicly disclose, within two business days, the details of any transactions related to the bill.
-- Elizabeth Douglass
(BEGIN TEXT OF INFOBOX)
At a glance
Highlights of the Emergency Economic Stabilization Act:
Provides as much as $700 billion for the Treasury to buy or insure securities based on troubled mortgages that are not being traded.
Releases $250 billion to the Treasury immediately. The president could authorize an additional $100 billion unilaterally, but Congress could block the final $350 billion.
Directs federal agencies to modify troubled loans whenever possible to help families facing foreclosure to stay in their homes.
Taxpayers would get a stake in firms that sell their devalued assets to the government, allowing them to share in potential future profits.
Limits pay and ends “golden parachutes” for top executives of certain companies that take part in the program.