The Bush administration insisted Sunday that Congress must move quickly to approve what one lawmaker called the “mother of all bailouts” – a $700 billion proposal to buy a mountain of bad mortgage debt in an effort to unfreeze the nation's credit markets.
Congressional leaders endorsed the plan's main thrust, saying passage might occur within days. But they said it must be expanded to include help for people on Main Street, as well as the big Wall Street financial firms that have lost billions of dollars through bad investment decisions.
The proposal “does not include the necessary safeguards,” said House Speaker Nancy Pelosi, D-Calif. She called for “independent oversight, protections for homeowners and limits on executive compensation.”
Treasury Secretary Henry Paulson stressed that time is critical to get the proposal passed and that changes to the administration's measure, which was sent to lawmakers Saturday, could delay that approval, further unsettling global financial markets, which have already seen stomach-churning days as the result of the biggest Wall Street upheaval since the Great Depression.
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The administration, scrambling to deal with the tumult, announced late Sunday it was modifying a program announced just two days before to try to bolster the teetering $3trillion money-market mutual fund industry.
On Friday, the government said it would use a $50 billion Treasury fund to provide government guarantees for money-market mutual fund accounts. However, in a significant revision late Sunday, the Treasury Department said it would only guarantee funds that were in the accounts as of last Friday, indicating that money deposited after that date would not be guaranteed.
The guarantees had been put in place to stem a wave of withdrawals from mutual fund accounts that had been sparked largely by panicked institutional investors.
But the banking industry had complained that the new guarantees might spark withdrawals by savings depositors. The industry feared transfers of savings deposits, which are government-insured, to money-market mutual funds, which often pay more in interest but up until Friday had not enjoyed any government guarantees.
In another change, Treasury said funds deposited in tax-exempt money-market mutual funds as of last Friday would also be covered. Originally, the department had said those funds would not be covered because it might jeopardize their tax-exempt status.
In the past two weeks, the government has taken over the country's two biggest mortgage companies, Fannie Mae and Freddie Mac, and its biggest insurance company, American International Group Inc., and stood by while the nation's fourth-largest investment bank, Lehman Brothers, was forced to declare bankruptcy and another investment giant, Merrill Lynch, was forced to sell itself to Bank of America.
Paulson and Federal Reserve Chairman Ben Bernanke made the joint decision last week that the only way to stop the carnage was to deal with the root cause of all the troubles, billions of dollars of bad mortgage debt sitting on the books of major financial companies.
This debt has triggered the worst credit crisis in decades, causing credit markets to essentially freeze up last week despite the fact that the Fed joined with major central banks around the world to pump billions of dollars into the financial system.
The plan the administration has developed with support from the Fed would have the government buy up to $700 billion of the bad loans, taking them off the books of financial firms with the hope that this will allow those companies to resume normal lending operations. Sen. Richard Shelby of Alabama, the top Republican on the Senate Banking Committee, said the government's efforts would be the “mother of all bailouts” that could well cost $1 trillion when the cost of the government takeovers of Fannie, Freddie and AIG were included.
Paulson, appearing on four of the five Sunday morning talk shows to sell the plan, insisted that the administration had no choice. The cost of doing nothing would have been far more severe because the clogged credit markets would make it harder for businesses to get the loans they need to keep operating, he said.
Doing nothing also would make it harder for consumers to get the credit they need for car loans and other purchases, the Treasury secretary said. Consumer spending accounts for two-thirds of total economic activity.
“We need to look at what is going on in the credit markets and they are still very fragile right now and frozen,” Paulson said on NBC's “Meet the Press.” In addition to what is happening in the United States, Paulson said he was confident that other major countries would take similar actions to support their financial systems, helping to avert a global meltdown.
“We have a global financial system, and we are talking very aggressively with other countries around the world and encouraging them to do similar things, and I believe a number of them will,” Paulson said on ABC's “This Week.” He refused to name the countries that he expected would act.
Congressional Democrats said they understood the need for urgency but insisted that the measure needed to provide help for homeowners threatened with losing their homes. And some GOP leaders told the White House on Sunday to prepare to accept more oversight and guarantees that the Treasury will recoup some of the bailout money.