Policymakers: Congress Must Move Quickly to Avert Damage
Lawmakers Remain Deeply Skeptical of Financial Rescue Plan
By William Branigin and Neil Irwin
Washington Post Staff Writers
Tuesday, September 23, 2008; 5:09 PM
A massive federal plan to revive the U.S. financial system ran into intense skepticism today on Capitol Hill, where lawmakers from both parties questioned whether it would work and demanded protections for taxpayers with tough oversight.
Appearing before the Senate Banking Committee, the nation's top economic policymakers warned that failure to pass a rescue plan quickly would impose a greater risk for taxpayers than the estimated $700 billion potential cost of bailing out the troubled financial system.
Treasury Secretary Henry M. Paulson Jr. and Federal Reserve Chairman Ben S. Bernanke argued for broad authority to intervene in financial markets promptly and forcefully enough to avert a meltdown that could mire the economy in a deep recession. But Democrats and Republicans alike said they would not be stampeded, complained about what they called the ad hoc nature of the proposal and insisted that taxpayers and beleaguered homeowners get something in return for assuming Wall Street's risks.
"It's a sad story, but the American taxpayer . . . is already on the hook," Paulson said. He cited widespread dependence on credit, which he said would be at risk without massive federal intervention to prop up the financial system.
Paulson conceded in his testimony that "there will be experimentation" as the unprecedented rescue program is implemented. He said he would welcome strong oversight but warned senators that imposing "punitive conditions" on the program or limiting participation in it would cause it to fail, "and we'll all lose."
"I have never been a proponent of intervention," said Paulson, a former chief executive of the Goldman Sachs global investment banking firm. "But we have an unprecedented situation here, and it calls for unprecedented action. There is no way to stabilize the markets . . . other than government intervention."
Bernanke warned that without the program, fragile financial markets "will get worse." If credit markets are not functioning, he said, "I believe . . . that jobs will be lost, the unemployment rate will rise, more houses will be foreclosed upon, GDP will contract, that the economy will just not be able to recover in a normal, healthy way no matter what other policies are taken."
During the nearly five-hour hearing, Paulson, Bernanke and other engineers of the government bailout plan came under a verbal pummeling, as senators from across the ideological landscape criticized a plan that many said would fund Wall Street at the expense of ordinary Americans.
Following the hearing, the committee chairman, Sen. Christopher J. Dodd (D-Conn.), told reporters that the administration's proposal "is not acceptable" and the ranking Republican member, Sen. Richard C. Shelby (Ala.), suggested that Congress consider "some alternatives."
Many critics said major action needs to be taken, but that did not keep senators from both parties from blasting a Bush administration plan that many said was too rushed, too vague and too favorable to large Wall Street companies.
"I'm not going to be stampeded into rubber-stamping this proposal," said Sen. Robert Menendez (D-N.J.). "There are serious questions that we need answers to before you have at least my vote." He later said he gets the feeling "that we're flying by the seat of our pants."
Shelby said that "while Wall Street banks get to sell their bad investments to the Treasury Department, homeowners will still be saddled with mortgages they cannot afford."
"I don't think a single call to my office about this has been positive," said Sen. Sherrod Brown (D-Ohio). He said there was "outrage from taxpayers" about bailing out Wall Street financiers whose country club memberships cost many times more than most Americans' salaries.
Consensus is building in Congress that a version of the bailout will be passed, and quickly, but that it will involve considerably more oversight and other provisions that were not in the Bush administration's original plans.
In their most vigorous public defenses of the planned bailout to date, Paulson and Bernanke almost seemed to echo the outrage from their questioners. But they argued that the plan is necessary to protect ordinary Americans from the economic fallout of clogged markets for credit.
"I'm not only concerned, I'm angry about the things that got us here," said Paulson. "It makes me angry, and it makes you angry. You talk about taxpayers being on the hook? Guess what? They're already on the hook. If the system isn't stabilized, they're going to bear the cost."
He said later in response to a question, "I share the outrage that people have. It's embarrassing for the United States of America."
Both Paulson and Bernanke stressed that they are still working through details of how the government would price the troubled mortgage assets it buys under the $700 billion plan. But they asked that Congress leave them maximum flexibility to design those auctions or other procedures as they and their expert advisers see fit.
The hearing room was packed, and there were occasional exclamations, cheers and jeers from the audience. None of these are commonplace at hearings of the Senate Banking Committee, whose last meeting was on "Proposed Changes to Accounting for Off-Balance Sheet Entities."
"There will be no outbreaks of applause or other comments," boomed Chairman Dodd after one such outburst. "This is a serious hearing."
Serious, indeed. Senators almost seemed to be engaging in one-upmanship in describing the how consequential the gathering was.
"This may be the most important hearing our committee has conducted in the 22 years I have been a member," said Shelby.
"We gather here today at a time of the most palpable sense of national crisis since we gathered here in this building immediately following the 9/11 attacks," said Sen. Evan Bayh (D-Ind.)
In opening statements, Dodd and Shelby criticized what they said was the ad hoc nature of the government's response to the financial crisis and complained that the administration's proposal lacks detail.
Senators also said any legislation should help homeowners who are struggling to pay their mortgages remain in their homes.
"This proposal is stunning and unprecedented in scope -- and lack of detail, I might add," Dodd said. "It would allow the secretary of the Treasury to intervene in our economy by purchasing at least $700 billion of toxic assets. It would allow the secretary to hold on to those assets for years and to pay millions of dollars to handpicked firms to manage those assets. It would do nothing, in my view, to help a single family save a home. . . . It would do nothing to stop even a single CEO from dumping billions of dollars of toxic assets on the backs of American taxpayers. . . . And it would allow this secretary and his successors to act with utter and absolute impunity, without review by any agency or a court of law."
Dodd added, "After reading this proposal, I can only conclude that it is not just our economy that is at risk, but our Constitution as well."
While speed is important, he said, "I'm far more interested in whether or not we get this right. There is no second act to this. There is no alternative idea out there with the resources available if this does not work."
Shelby said he has long opposed government bailouts for individuals or corporations as a matter of principle.
"Unfortunately the Treasury Department's latest proposal continues . . . its ad hoc approach, but on a much grander scale," he told the panel. "What troubles me most is that we have been given no credible assurances that this plan will work. We could very well spend $700 billion or a trillion and not resolve the crisis." He complained that "the incredibly accelerated process for considering this bill means that Congress does not have time to determine if there are better alternatives, or any alternatives, to the Treasury's plan."
Paulson said in response to criticism of the Treasury's original three-page proposal that the idea was to work with Congress on a detailed package. He said it would have been "presumptuous," for example, to include a detailed mechanism for oversight, which is "the role of Congress."
Paulson said longer-term reform to fix an "outdated regulatory structure" and address "other flaws and excesses in the system" should be taken up later. "It can't be addressed this week."
In his own opening statement, Paulson said that postponing action on the Bush administration's bailout proposal would risk "a continuing series of financial institution 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."
To aid the lobbying push, the administration said that Vice President Cheney met today with members of the conservative Republican Study Committee today to try to address their concerns about an expensive government rescue of private companies. Conservatives have challenged the cost and scope of the proposal, while Democrats have argued it should include help for homeowners.
"We certainly understand a lot of the questions up there," White House spokesman Tony Fratto said. "What the vice president and others will emphasize is that this is absolutely necessary to do right now. In no way should it signal any abandonment" of the free market system.
President Bush, in New York to speak before the United Nations, said he has assured world leaders "that the plan laid out by Secretary Paulson is a robust plan to deal with a serious problem." He said he also offered assurances that congressional leaders from both parties want "to get something done quickly."
Bush told reporters before a meeting with the president of Pakistan: "Now, there's a natural give-and-take when it comes to the legislative process. There are good ideas that need to be listened to in order to get a good bill out that will address the situation. But I'm confident . . . that there will be a bipartisan bill, that the Republicans and Democrats will come together to get this piece of legislation passed, which is necessary to address the financial situation and provide a rescue plan to make sure that there's some stability in the markets."
The Bush administration is resisting changes to the measure being sought by Democratic leaders and many Republicans, including one that would grant the government authority to cut executive pay at firms that participate in the bailout and another that would guarantee that taxpayers share in the profits if those firms recover financially.
In today's hearing, Paulson repeatedly rebuffed such proposals, arguing that the government needs maximum flexibility to deal with the crisis and should do everything it can to ensure broad participation in the program.
But even Republicans who have strongly supported the Bush administration were critical.
"Where's the accountability for these banks and their management?" Sen. Mike Enzi (R-Wyo.) demanded. "The Treasury and the Federal Reserve have asked them to cut the biggest bailout check in history, and that money will be handed out to the same banks that put us in the mess to begin with." Noting that the bailout would cost every man, woman and child in America $2,300, he said, "This legislation must be passed to help Main Street, not because the federal government is being held hostage by Wall Street."
Sen. Jim Bunning (R-Ky.), like Shelby a staunch philosophical opponent of bailouts, charged that the proposal would merely "throw money at a problem," as he said Washington often does.
"We cannot make bad mortgages go away," he said. "We cannot make the losses that our financial institutions are facing go away. Someone must take those losses. We can either let the people who made the bad decisions bear the consequences of their actions, or we can spread that pain to others." The Paulson plan, he said, would "take Wall Street's pain and spread it to the taxpayers."
Bunning declared, "This massive bailout is not a solution. It is financial socialism, and it's un-American."
Sen. Elizabeth Dole (R-N.C.) said she was "not at all convinced that this bailout plan, which appears incredibly expensive and hastily concocted, is the answer."
Democrats stressed that homeowners facing foreclosure need help, too.
"Why are we asked to put $700 billion to keep CEOs in their office, while families get kicked out of their homes and the public gets the bill?" asked Sen. Robert Menendez (D-N.J.).
Staff writers Howard Schneider, Lori Montgomery, Paul Kane, David Cho, Ellen Nakashima and Michael Abramowitz contributed to this report.