WASHINGTON, September 21 – Democrats and Republicans faced off Sunday over the US government’s landmark request for $700 billion to bail out financial institutions as Democratic lawmakers insisted homeowners also be offered relief.
The plan, which the Bush administration sent to Congress late Friday, gives Treasury Secretary Henry Paulson sweeping authority over the next two years to buy up to $700 billion of toxic mortgage-related assets to stem the grave financial crisis, according to a draft proposal.
Congressional and administration officials, including Paulson, planned to work on the bailout plan through the weekend due to the urgency of the situation, which the Bush administration says would be catastrophic for the US financial system if left unaddressed.
Coming on the heels of the unprecedented government rescue of giant insurer American International Group (AIG) and the seizure of mortgage-finance giants Fannie Mae and Freddie Mac, the legislation could produce the most significant changes in financial regulation since the 1930s Great Depression.
Lawmakers expect to pass it within a week.
House of Representatives Speaker Nancy Pelosi said that Democrats would work with Republicans to craft a bailout measure, but insisted that the interests of common Americans must be kept in mind.
In a statement late Saturday, Pelosi said the Bush administration "has requested that Congress authorise, in very short order, sweeping and unprecedented powers for the Treasury secretary to confront a financial crisis of historic proportions."
Democrats will work with Bush officials to address the crisis, she said, "but we must insulate Main Street from Wall Street and keep people in their homes by reducing mortgage foreclosures."
Senate Majority Leader Harry Reid said: "It is now self-evident that the Bush administration’s extreme hands-off policies have been disastrous … The American people have every right to be outraged that we are at this point."
Reid said the Bush administration proposal "raises some serious issues" and insisted "we need to resolve them quickly."
The Republican Senate Minority Leader, Mitch McConnell, issued a statement calling for the bailout plan to remain free of "partisan plans or pet projects."
In a fact sheet on the plan released late Saturday, the Treasury Department said that private asset managers would manage the assets at its direction "to meet program objectives."
The pricing of the toxic mortgage-related assets, whose value has plummeted in the worst US real-estate slump in decades, will be done "through market mechanisms where possible, such as reverse auctions," the Treasury said.
The fact sheet did not specify what type of financial institutions qualified for the bailout, but appeared to open the door to foreign firms.
"Participating financial institutions must have significant operations in the US, unless the (Treasury) secretary makes a determination, in consultation with the chairman of the Federal Reserve, that broader eligibility is necessary to effectively stabilize financial markets."
The Treasury would be authorized to purchase mortgage-related assets from any financial institution headquartered in the United States and required to regularly report to Congress about its activities.
The draft does not detail the process of buying bad assets, but media reports indicated it was likely to involve what’s called a reverse auction process.
In a regular auction, a seller asks a starting price and bids go upwards. In a reverse auction, however, the buyer – or the US government – asks for a price and the seller decides whether or not to accept it.
Speaking after a week of upheaval in financial markets, Bush defended the proposed bailout, citing the gravity of the financial crisis.
"This is a big package because it was a big problem," Bush told reporters Saturday. "I will tell our citizens and continue to remind them that the risk of doing nothing far outweighs the risk of the package."
He said his administration would work with lawmakers "to get a bill done quickly."
Senator Charles Schumer of New York said that Paulson, in talks Saturday, had "understood that many in Congress, both Democrats and Republicans, want to make sure there are protections for homeowners, and in the next day there will be a whole lot of discussions between the Congress and the secretary’s office about that subject."
Negotiations on the proposed bailout could be complicated by a tight presidential election race six weeks ahead of November 4 polls and as Democrats battle to bolster their narrow majority in Congress.
The White House plan would lift the public debt limit, to $11.3 trillion from $10.6 trillion. The limit is the maximum amount of money the government can borrow without authorization from Congress.
The rescue package follows an escalating 14-month-old credit crunch stemming from a meltdown in US home prices after a frenzied real-estate boom fuelled by easy credit.