Following one of the most chaotic weeks in the history of Wall Street, U.S. Treasury Secretary Henry Paulson on Saturday proposed to Congress a $700 billion bailout plan directed at the heart of the crisis.
The plan, which gives the Secretary broad authority to purchase mortgage-related assets from any U.S. financial institution, will be discussed with congressional authorities over the weekend. The White House hopes the action will find agreement before markets open Monday morning.
The action of purchasing masses of bad debt from numerous institutions is hoped to restore confidence in the financial system by clearing up toxic assets obstructing bank-to-bank lending. It should also quell criticism that the Federal Reserve and U.S. Treasury are responding to the crisis on an issue-by-issue basis and failing to address the underlying problem.
"We must now take further, decisive action to fundamentally and comprehensively address the root cause of our financial system's stresses," Paulson said on Friday. "The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy."
The proposal states that the Treasury Secretary will be "authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States."
It will give the Secretary the power to take such action "without limitation" and as deemed necessary for two years from the first exercise.
"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," the proposal reads.
However, the Secretary would be required to report to appropriate committees within three months of the plan's launch, and semi-annually thereafter.
As of Saturday, details of the package were vague. No information has been given on prices or which financial institutions would be eligible for the program - it's unclear whether hedge funds and pensions would be included, for instance - nor has it been stipulated what the government will receive in return for purchasing the junk debt.
In order to implement the plan, Paulson has asked for the legal ceiling on the national debt to be raised to $11.3 trillion from $10.6 trillion.
President George W. Bush commented that the package is big because the problem is big. "The risk of doing nothing far outweighs the risk of the package," Bush said, adding that, "Over time, we're going to get a lot of the money back."
Democrats are reportedly trying to enlarge the package to include assistance to homeowners. Senator Chuck Schumer of New York called the plan "a good foundation" but he is seeking more protection for homeowners and taxpayers. Others would like to see measures that would help prevent home foreclosures.
Under a section entitled "Considerations," the letter says "providing stability" and "protecting the taxpayer" will be part of the plan, but no details are given.
The House's top Republican, John A. Boehner of Ohio, said he was "furious" about the whole situation, and criticized "efforts to exploit this crisis for political leverage."
Partisan fighting could delay the implementation of the action, but President Bush said efforts will be made to work with Congress quickly. He said he hopes to avoid adding controversial amendments that would delay the implementation process.
By Patrick McGee and edited by Stephen Huebl
©CEP News Ltd. 2008