Legality of $700 Billion Bailout Questioned
Questions are also being raised over the legality of the Bush administration’s proposed bailout. Ross Sorkin of the New York Times writes Treasury Secretary Henry Paulson is asking for the financial equivalent of the PATRIOT Act. Sorkin writes that the proposed bill would give the Treasury Secretary “perhaps the most incredible powers ever bestowed on one person over the economic and financial life of the nation.” Section 8 of Paulson’s plan states: “Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.” Paulson, the former head of Goldman Sachs, is scheduled to testify today and tomorrow before House and Senate committees.
New York Times
September 24, 2008
Buyout Plan for Wall Street Is a Hard Sell on Capitol Hill
By MARK LANDLER and STEVEN LEE MYERS
WASHINGTON — Treasury Secretary Henry M. Paulson Jr. received an angry and skeptical reception on Tuesday when he appeared before the Senate Banking Committee to ask Congress to promptly give him wide authority to rescue the nation’s financial system.
Mr. Paulson urged lawmakers “to enact this bill quickly and cleanly, and avoid slowing it down with other provisions that are unrelated or don’t have broad support.”
The Federal Reserve chairman, Ben S. Bernanke, who appeared with Mr. Paulson, said the financial system “continues to be very unpredictable, and very worrisome,” and that inaction could lead to a recession.
But after hours of back-and-forth, the committee’s leaders said explicitly what had seemed clear all day: that they rejected the administration’s plan. “What they have sent us is not acceptable,” the committee chairman, Senator Christopher J. Dodd, Democrat of Connecticut, told The Associated Press.
The panel’s ranking Republican agreed. “We have to look at some alternatives,” Senator Richard C. Shelby of Alabama told The A.P.
One after another throughout the session, senators from both parties said that, while they were prepared to move fast, they were far from ready to give the administration everything it wanted in its proposed $700 billion plan to buy up and hopefully resell troubled mortgage-backed securities.
On the House side of the Capitol, the mood was apparently similar after Vice President Dick Cheney met with Republican members. “Hardly anyone in that room has decided yet how they’re going to vote on this,” Representative Phil Gingrey, Republican of Georgia, told Bloomberg News.
Senator Dodd called the Treasury proposal “stunning and unprecedented in its scope and lack of detail.”
Asserting that the plan would allow Mr. Paulson to act with “absolute impunity,” Senator Dodd said, “After reading this proposal, I can only conclude that it is not only our economy that is at risk, Mr. Secretary, but our Constitution, as well.”
Another expression of disgust came from Senator Jim Bunning, Republican of Kentucky, who said the plan would “take Wall Street’s pain and spread it to the taxpayers.”
“It’s financial socialism, and it’s un-American,” Mr. Bunning said.
Senator Dodd called the crisis “entirely foreseeable and preventable, not an act of God,” and said that it angered him to think about “the authors of this calamity” walking away with the usual golden parachutes while taxpayers pick up the bill.
“There is no second act on this,” Mr. Dodd said, acknowledging that speed was important. But it is more important, he said, “to get it right.”
Mr. Paulson said in response to questions that he shared the senators’ exasperation. “I’m not only concerned, I’m angry” over the events that led to the problem, Mr. Paulson said. He blamed an outdated regulatory system for the turmoil and, in an effort to counter any impression that the proposed rescue plan is for the benefit of fat-cat Wall Streeters, said: “This is all about the taxpayers. That is all we are about.”
Mr. Paulson said that “this troubled asset purchase program is the single most effective thing we can do to help homeowners, the American people, and stimulate our economy.”
He and Mr. Bernanke said that the problems in the housing industry were the core of the crisis but that the problems would continue to spread far outside the housing sector if the problems in the mortgage markets were not addressed, and soon.
With global financial stresses and uncertainties continuing to play out, Mr. Bernanke warned in his testimony that “if financial conditions fail to improve for a protracted period, the implications for the broader economy could be quite adverse.” He reminded the senators at one point that he had never worked on Wall Street and was instead an economic scholar who had studied earlier financial crises, including the Depression.
Senator Charles E. Schumer, Democrat of New York, recalled Mr. Bernanke telling him in a recent meeting that the growing freeze in the credit markets, spawned by troubles with shaky mortgages, meant that “the arteries are clogged,” and that without action “the patient will surely suffer a heart attack.”
So Congress will act quickly, Mr. Schumer said, but not without strict scrutiny. “Even on Wall Street, $700 billion is a lot of money,” he said. And Representative Steny Hoyer of Maryland, the Democratic majority leader, said it was “not tenable” to think that Congress would approve a bailout measure without a cap on executive pay, despite opposition from the Bush administration.
None of the senators who listened to Mr. Paulson and Mr. Bernanke disputed the grim possibilities if Congress should do nothing, but it was clear that they were hearing from their angry constituents. Senator Elizabeth Dole of North Carolina, for instance, said residents of her state have been complaining about “costly and reckless” behavior on Wall Street, and the potential cost to people who are anything but wealthy. (Senator Dole is running for re-election.)
President Bush, speaking in New York before the markets opened, expressed confidence that Congress would agree on a financial bailout plan and left open the possibility of accepting amendments being proposed by Democrats.
“Now there’s a natural give and take when it comes to the legislative process,” Mr. Bush said in brief remarks with the president of Pakistan, Asif Ali Zardari. “There are good ideas that need to be listened to in order to get a good bill that will address the situation.”
In a statement released earlier in the day, Mr. Bush said he had reassured worried world leaders that the United States had the “right plan” to deal with the crisis.
The senators on the banking panel were unanimous in calling for ways to protect taxpayers’ investments — which at $700 billion would amount to $2,300 for every American citizen, Senator Mike Enzi, Republican of Wyoming, noted.
Mr. Paulson had been expected to encounter sharp questioning from lawmakers about the scope of the program, although several members of the banking committee applauded the credentials of Mr. Paulson and Mr. Bernanke.
Democrats and Republicans are eager to include legislation that would protect mortgage holders, cut the salaries of executives at Wall Street firms and prevent a breakdown of the financial system.
Senator Shelby expressed disdain for regulators “who sat on the sidelines” as the crisis was building. He recalled, too, that Alan Greenspan, the former Federal Reserve chairman, once told him that the rate of borrowing in the American economy and the high percentage of their incomes that many people were spending on their homes posed “a rather small risk to the mortgage market.”
Mr. Shelby complained that the emerging program seemed to be “a series of ad hoc measures” rather than the kind of comprehensive approach that is needed.
The back-and-forth came as the Bush administration and Congressional leaders moved closer to some kind of agreement on the bailout, including tight oversight of the program and new efforts to help homeowners at risk of foreclosure.
But Congress and the administration remained at odds over the demands of some lawmakers, including limits on the pay of top executives and new authority to allow bankruptcy judges to reduce mortgage payments for borrowers facing foreclosure.
Congressional leaders and Treasury officials also said they were close to an agreement over a proposal by some Democrats in which taxpayers could receive an ownership stake, in the form of warrants to buy stock, from firms seeking to sell distressed debt.
Lawmakers want to require an equity stake, while the administration wants flexibility on that matter, a Treasury official said.
Mr. Bernanke’s testimony was exceptionally brief, considering the enormous stakes involved, a mere nine paragraphs, much of it devoted to a recapitulation of the growing crisis and how it took shape.
It seemed to reflect the way Mr. Paulson and the administration have presented the bailout legislation, in bare-bones fashion, but with a clear tone of urgency.
The White House has begun intensive lobbying to persuade nervous lawmakers to support the plan. Joshua B. Bolten, the White House chief of staff, and Keith Hennessy, the chairman of Mr. Bush’s National Economics Council, were also headed to Capitol Hill on Tuesday.
Tony Fratto, Mr. Bush’s deputy secretary, told reporters there was a “great sense of urgency” to get the legislation passed this week.
Mark Landler reported from Washington and Steven Lee Myers from New York. David Stout, Brian Knowlton and Sheryl Gay Stolberg contributed reporting from Washington.
Wall Street’s Big Five Handed Out $39 Billion in Bonuses in 2007
Economists estimate that the $700 billion bailout will cost every American $2,300. ABC News reports the bailout comes less than a year after Wall Street’s five biggest firms—Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch and Morgan Stanley—paid a record $39 billion in bonuses to themselves. Those 2007 bonuses were paid even though the shareholders in those firms last year collectively lost about $74 billion in stock declines. The bonuses paid by these five firms averaged over $200,000 per employee.