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 that 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.
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.
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, 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.
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.
The cost of doing nothing would have been far more severe because the clogged credit markets would make it harder for businesses to get the loans they need to keep operating, he said. “We need to look at what is going on in the credit markets and they are still very fragile right now and frozen,” Paulson said on NBC’s “Meet the Press.”
Congressional Democrats said they understood the need for urgency but insisted that the measure needed to provide help for homeowners threatened with losing their homes.