WASHINGTON - Leaders of the Senate Banking Committee insisted yesterday that the Bush administration modify its proposed $700 billion bailout of the financial industry to include transparency, stronger accountability, and assistance for existing homeowners. Meanwhile, federal officials warned that Congress must approve a plan that avoids restrictions and gives the government as much flexibility as possible in order to avoid a financial meltdown.
In testimony before the committee, Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke each said the current financial situation is dire and that if Congress does not act, the financial well-being of American families will be threatened by frozen credit markets, and the viability of our economy will be placed into jeopardy.
"[The plan] gets to the root cause - housing - and deals with illiquid assets," Paulson said. "It's going to free up the balance sheets, let capital flow, and will lead to price discovery, private capital coming in, and injecting confidence in the markets."
The standoff between lawmakers and the administration comes as new issues in the municipal bond market have slowed dramatically below normal levels since late last week. According IPREO and The Bond Buyer, roughly $6 billion of proposed new muni bond issues have been pulled from the market since last Thursday and only $1.556 billion of new issues were expected to be sold this week - far below the $3 billion-plus of new issues typically sold in the relatively slow weeks around the Labor Day holiday.
Meanwhile, at a joint press briefing following a nearly five-hour hearing on the Treasury proposal, committee chairman Christopher Dodd, D-Conn., and Alabama Sen. Richard Shelby, the panel's ranking minority member, said they were doubtful lawmakers could come to an agreement in a rushed manner.
Dodd said that the administration's proposal "is not acceptable" without accountability from the Treasury, assistance for existing home owners, as well as "taxpayer protections." He did not elaborate. But Dodd's latest draft proposals to address the concerns include the creation of an independent board to oversee Treasury's purchases, reports to Congress, restrictions on executive compensation for the executives of firms that seek to sell assets through the program, and Federal Deposit Insurance Corp. management of mortgage assets.
Dodd said it is up to the Senate leadership to decide what to do next. He also said he wants the Senate and House to coordinate their efforts to draft and enact legislation.
"The question now is, can we come together with the House and Senate, Democrats and Republicans, and respond at this moment? I don't have a clear answer for you yet," Dodd told reporters. "I think many of us would like to sit down and do that, but we've got a lot of questions that need to be answered before we go forward."
House Financial Services Committee chairman Barney Frank, D-Mass., yesterday told reporters that he hoped today to meet with Senate leaders and to work out their differences.
Dodd said the restrictions on executive compensation is a key concern for many lawmakers. During the hearing, he said "you can count on" some compensation limits being included, though Paulson worried that any attempt to include such amendments would decrease participation in the program.
Shelby expressed some of the strongest reservations about the proposal, saying that it "continues an ad hoc approach, but on a much grander scale."
"Wall Street [firms] bet that the Treasury would rescue them if they got into trouble and it appears that they were right," he said. "We could very well spend $700 billion and not resolve the crisis."
Several lawmakers said that they were caught by surprise by the administration's massive request, and expressed reluctance to rush to vote on it this week before Congress adjourns, because of concerns that a hasty response would not restore confidence to the financial markets.
"Every time we've made a spur-of-the-moment decision that we didn't do our due diligence on, it has been a wreck," said Sen. Jon Tester, D-Mont., referring to his historical experiences with crises. "The truth is, we have to be given the time to do this right or it's not going to work and we're going to be back here on the same issue in one or two years."
Meanwhile, Sen. Jim Bunning, R-Ky., was upset at reports that the Treasury would use its authority to buy student loan and credit card debt if its main goal is to take troubled mortgage-related securities off the books of financial institutions.
Paulson said that "the vast bulk of our effort needs to be aimed at mortgage-related securities" but would not rule out purchasing other types of assets. The development is significant for the municipal market, because sources said that lobbyists for broker-dealers are pushing for the Treasury to have the discretion to purchase illiquid auction-rate securities.
Sen. Charles Schumer, D-N.Y. asked Paulson about the idea of Congress authorizing the Treasury only about $150 billion initially to purchase troubled mortgage-related assets and then considering providing more funding next year.
"I think it would make people sit a little easier," he said.
But Paulson balked at the idea, saying, "I think that would be a very grave mistake." He said that even though the Treasury plans to purchase the assets in tranches, the department needs authority for the full $700 billion.
Despite skepticism from lawmakers, Paulson argued that the Treasury proposal would "avoid a continuing series of financial failures and frozen credit markets that threaten American families' financial well-being, the viability of businesses both small and large, and the very health of our economy."
The Treasury secretary said he agrees that the plan "must also protect the taxpayer to the maximum extent possible, and include provisions that ensure transparency and oversight while also ensuring the program can be implemented quickly and run effectively."
In response to concerns about how the Treasury Department would purchase the assets, Bernanke said that auctions could be designed for Treasury to bid on, and purchase, troubled securities to establish "reasonable hold-to-maturity prices for these assets."
Meanwhile, Securities and Exchange Commission chairman Christopher Cox, whom Dodd chided for not getting his testimony to the committee until just before the hearing began, urged Congress to consider providing regulators with the authority to regulate the $58 trillion notional market in credit default swaps.
"Neither the SEC nor anyone else has oversight of the credit default swaps market," Cox said, adding that it was therefore "ripe for fraud and manipulation." Cox also said it was a "costly mistake" that Congress failed, in the Gramm-Leach-Bliley Act, to provide any regulator with oversight over broker-dealer holding companies.
Also pushing financial regulatory reform, Paulson said he was shocked when he came to Washington in 2006 and discovered that the financial industry is overseen by a "totally outmoded and insufficient regulatory system" that has not kept pace with changes in the markets. He agreed with lawmakers that regulatory reform should be debated in Congress next year.
In his opening remarks, Paulson dismissed concerns voiced by several lawmakers that the Fed and Treasury's previous bailouts of Bear, Stearns & Co., Fannie Mae, and Freddie Mac, as well as American International Group Inc., were ineffective. The lawmakers made disparaging quips about the "bazooka" that Paulson referred to at a July hearing of the committee, when he sought unlimited authorization to bail out Fannie and Freddie.
"If you've got a squirt gun in your pocket and people know that, you may have to take it out and use it, but if you've got a bazooka, you may not have to take it out," he said.
Paulson told the lawmakers yesterday, "You can be darn glad you gave us the bazooka, because we needed it."
After Congress authorized the Fannie and Freddie bailout, "we came in, we stabilized the markets, and mortgage rates went down so the capital could flow through our system," he said. "Thank goodness that was done and they were stabilized before we had some investment banks report their earnings, or let me tell you this would be a much more serious situation than it is today."