Paulson and
Bernanke Stampede Washington - Continue Raid On The Public Purse
Citing Grave Financial Threats, Officials
Ready Massive Rescue
Lawmakers Work With Fed, Treasury To Try to
Restore The Flow of Money
By Binyamin Appelbaum and Lori Montgomery
Washington Post Staff Writers
19/09/08 "Washington
Post" -- - Friday, September 19, 2008; Page A0 -- The
Bush administration is urgently preparing a massive intervention
to revive the U.S. financial system, including a plan to sweep
away the unpaid loans that are choking banks and blocking the
flow of money to borrowers.
Congressional leaders gave bipartisan support to the
administration's efforts after a meeting last night with
Treasury Secretary Henry M. Paulson Jr. and Federal Reserve
Chairman Ben S. Bernanke.
Paulson and Bernanke presented a "chilling" picture of the state
of the financial system, according to a participant in the
meeting who spoke on condition of anonymity. Lawmakers were told
that the consequences would be grave if they failed to pass
legislation by the end of next week. Sen. Harry Reid (D-Nev.)
and Rep. Nancy Pelosi (D-Calif.) committed to meeting that
deadline.
The plan involves using hundreds of billions of dollars in
government funding to buy bad loans, leaving banks with more
money and fewer problems, according to two sources familiar with
what was said at the meeting.
After the meeting, Paulson told reporters the proposal was "an
expeditious solution that is aimed right at the heart of this
problem."
Also last night, the Fed was considering offering backing for
money-market mutual funds, which have had massive withdrawals in
recent days, said a source familiar with the discussions.
And the Securities and Exchange Commission is considering
further limits on short-selling, a practice that allows
investors to bet on a decline in a company's stock price,
according to a person familiar with the matter. Critics of the
practice say short sellers are driving down the share prices of
financial companies, thereby contributing to their destruction.
The government has already tried three times this month to keep
money flowing through the financial system. It took over the two
largest providers of funding for mortgage loans, Fannie Mae and
Freddie Mac. It created a new source of funding for investment
banks. And it took over the insurance giant American
International Group.
Now the government is contemplating its broadest -- and perhaps
most expensive -- intervention to date.
The urgency has only grown with each successive intervention
because the first three tries have not worked. People are
withdrawing money from money-market mutual funds. Banks are
refusing to lend to one another. Several large financial
companies need money to stay in business, including the bank
Washington Mutual, which is seeking a buyer.
Regulators and the banking industry are increasingly concerned
about customer withdrawals from money-market funds. Crane Data,
which tracks the industry, said total deposits in money-market
funds fell Wednesday by at least $79 billion, or about 2.6
percent. Financial executives have told government officials in
recent conversations that the rising pace of withdrawals is the
equivalent of a bank run and that if it continues, it will drain
a massive and critical source of funding.
Money-market funds are particularly important because they buy
short-term debt, which is used by financial companies and other
corporations to finance day-to-day activities.
According to legislative aides, yesterday's meeting was arranged
after Pelosi called Paulson's office mid-afternoon to discuss
the state of the markets. During that call, Paulson asked to
meet with Pelosi, Reid and key lawmakers from the banking
committees. That meeting took place at 7 p.m. in Pelosi's office
on the second floor of the Capitol.
Paulson and Bernanke did not present lawmakers with a written
proposal but are expected to do so by tonight, congressional
aides said.
During the meeting, one lawmaker worried aloud that Paulson was
asking for "a blank check," according to a participant. There
was also a "healthy debate" about whether this action would
finally stabilize the markets.
"They couldn't answer yes to that question," the participant
said.
Paulson and Bernanke generally have kept Congress at arm's
length as they have sought to deal with the financial crisis.
Yesterday, however, after meeting with congressional leaders,
they exchanged awkward compliments with the lawmakers at a news
conference. Lawmakers had been increasingly critical of the Fed
and Treasury leaders for failing to consult with Capitol Hill.
The administration will need congressional approval to commit
taxpayer money to its new plan.
"We'll do this as quickly as we can. We're not talking about a
month," said Rep. Barney Frank (D-Mass.), chairman of the House
Financial Services Committee, which would probably review the
plan before it went to the House floor.
A hearing on the topic that Frank had scheduled for next
Wednesday could now become a legislative drafting session, he
said.
Also yesterday, Sen. Charles E. Schumer (D-N.Y.), chairman of
the Joint Economic Committee, suggested that the government
create an entity that would operate much like the Depression-era
Reconstruction Finance Corp. -- it would buy "equity and
possibly secured debt," providing desperately needed cash to
companies while permitting the government to share in any
profit.
"The government would get repaid before the others in the
financial chain," Schumer said.
If a plan does move forward, Democrats may try to demand
concessions from the suddenly humbled industry, Schumer said,
including support for a proposal to permit bankruptcy judges to
modify mortgages for distressed borrowers. Currently, judges may
set new terms for mortgages on second homes but not on primary
residences.
That idea is contentious and has been fiercely opposed by the
banking industry. Frank said he would instead demand that banks
reduce the number of foreclosures.
Still, it's not clear that Democrats would insist on such
concessions at the expense of passing the plan quickly.
"The costs of doing nothing are enormous," Frank said. He added
that with the recent deterioration in the financial markets, "I
think the timetable for something has been greatly sped up."
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