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Allow $500 Billion Rescue Plan Or Face Disaster, Congress Told

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The New York Times

Published: September 20, 2008

WASHINGTON - The Bush administration, moving to prevent an economic cataclysm, urged Congress on Friday to grant it far-reaching emergency powers to buy hundreds of billions of dollars of distressed mortgages despite many unknowns about how the plan would work.
Treasury Secretary Henry Paulson made it clear that the upfront cost of the rescue proposal could easily be $500 billion, and outside experts predicted that the bill could reach $1 trillion.

The outlines of the plan, described in conference calls to lawmakers Friday, include buying only from U.S. financial institutions - but not hedge funds - and hiring outside advisers who would work for the Treasury, rather than creating a separate agency.
Democratic leaders immediately pledged to work closely with Paulson to pass a plan in the next week, but they also demanded that the measure include relief for deeply indebted homeowners, and not just for the banks and Wall Street firms.

Paulson and Federal Reserve Chairman Ben Bernanke told lawmakers that the financial system had been perilously close to collapse.

According to notes taken by one participant in a call to House members, Paulson said that the failure to pass a broad rescue plan would lead to nothing short of disaster. Bernanke said that Wall Street had plunged into a full-scale panic, and warned lawmakers that their own constituents were in danger of losing money on holdings in ultra-conservative money-market funds.

He indicated that he wanted to buy securities from U.S. financial institutions, a decision that could anger the legions of foreign institutions that poured hundreds of billions of dollars into the American mortgage market during the housing boom, and that have customers located here.

Scores of basic questions remained unanswered as of Friday evening, including how much of the mortgage market the administration hoped to buy.

But as the stock market zoomed for the second day in a row, mainly in response to hopes of a sweeping bailout plan from Washington, President Bush and lawmakers alike focused on how fast they could deliver as much government help as necessary.

"Given the precarious state of today's financial markets - and their vital importance to the daily lives of the American people - government intervention is not only warranted, it is essential," Bush said.

News of the giant rescue plan sent stock markets soaring around the world. The Dow Jones industrial average shot up 368 points, or 3.35 percent, on Friday, after having jumped 410 points on Thursday on early rumors of the plan. The rally erased the losses from earlier in the week and allowed stock prices to end higher for the week.

Perhaps more important to Fed and Treasury officials, the credit markets showed signs of thawing as well. Yields on three-month Treasury bills had sunk to almost zero on Wednesday and Thursday as investors fled from most debt securities and poured their money into the safest and shortest-term Treasuries. But on Friday, the yield on three-month Treasuries had edged up to 0.99 percent - still well below normal, but much closer to normal.

As of Friday evening, Paulson had yet to deliver a formal plan to Congress. House and Senate leaders pledged to work through the weekend, but they insisted that Paulson bring them a detailed plan rather than just an outline.

An even bigger obstacle was the goal of the plan. Bush and Paulson made it clear that their primary, and perhaps only, goal was to stabilize the financial markets by removing hundreds of billions of dollars in "illiquid assets" from the balance sheets of banks and financial institutions.

"Confidence in our financial system and its institutions is essential to the smooth operation of our economy, and recently that confidence has been shaken," Bush said. "We must address the root cause behind much of the instability in our markets - the mortgage assets that have lost value during the housing decline and are now restricting the flow of credit."

But Democratic lawmakers insisted that any plan would also have to provide relief to millions of families that were poised to lose their homes to foreclosure.

The House Speaker, Nancy Pelosi of California, said she would insist that the plan "uphold key principles - insulating Main Street from Wall Street and keeping people in their homes by reducing mortgage foreclosures."

Democrats also plan to push another stimulus measure that could provide extra money for Medicaid, highways and public work projects.

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