9/21/2008
BAILOUT: Costs Higher Than You Think
Intervention buoys the financial sector at a time when consolidation is what the economy needs.
Colin Barr, senior writer
Last Updated: September 19, 2008: 5:32 PM EDT
FORTUNE (New York) -- Henry Paulson and Ben Bernanke have saved us, for now, from a market meltdown - but at the cost of allowing the folks who caused the current crisis to keep ducking reality.
In the long run, guess who gets to bear that cost?
The Treasury secretary and Federal Reserve chairman have spent September dashing off blank check after blank check in a bid to quell turbulent markets. Since Sept. 5, the feds have pledged $200 billion to shore up mortgage giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), $85 billion to prop up insurer AIG (AIG, Fortune 500), and $50 billion to guarantee money-market funds.
Then there are the untold sums the U.S. might spend under the plan Paulson unveiled Friday to set up a bad bank to relieve institutions of their troubled mortgage assets. And let's not forget the hundreds of billions the Fed has poured into the markets in the name of maintaining liquidity.
Even in a U.S. economy that produces $14 trillion worth of goods and services a year, that's a lot of cash.
Spending all that money, sooner or later, will intensify long-standing questions about the nation's fiscal health, possibly at the expense of another drop in the value of the dollar.
"We're going to be sorting this out for years," says Howard Simons, a strategist at Bianco Research in Chicago who questions the blitz of taxpayer spending on programs that haven't even been debated in Congress.
Ultimately, what could prove to be the most expensive aspect of the bailout spree is the message the government is sending to firms in which the market has lost confidence. Prudent management, it seems, will be punished, while the status quo - however unhealthy - must be maintained at all costs.
The strong stock-market rally of the past two days aside, intervention that fails to foster a shakeout of weaker firms will only delay the reckoning that must occur before a sustainable economic recovery can take shape.
"We continue to believe that the financial sector is in need of massive consolidation because the sector simply has too much lending capacity left over from the credit bubble," Merrill Lynch investment strategist Rich Bernstein writes Friday. "History shows well that consolidation is the primary driver of post-bubble economies."
The upside to down
Though the free fall in financial shares over recent weeks wasn't pretty to watch, it had the sanguine effect of forcing businesses with questionable fundamentals to confront an uncertain future. Take the case of Merrill Lynch (MER, Fortune 500) chief John Thain.
Thain took over at the struggling broker last November, promising to "continue to grow Merrill's global business and add value to our customers and our shareholders." He then spent 10 months recognizing more than $50 billion in losses, mostly on risky mortgage-related debt gone bad, and raising almost $30 billion in new capital, in a furious fight to keep the 94-year-old firm independent.
But in the meantime, the market was concluding that Merrill and its rivals at Lehman Brothers, Morgan Stanley (MS, Fortune 500) and Goldman Sachs (GS, Fortune 500) were pursuing a business model - the standalone trading firm that borrows heavily in the short-term debt markets - that makes no sense in an era of risk aversion and rising funding costs.
Thain, after a game fight, conceded to the market's view Monday, when Merrill - facing the prospect of a run on its shares after Lehman imploded - agreed to sell itself to Bank of America (BAC, Fortune 500) for $44 billion in stock.
Thain, of course, had seen his peer Dick Fuld run Lehman Brothers into the ground by refusing to accept the low-ball offers of potential partners, a stand that ended up putting thousands of Lehman workers out of work. Thain chose instead to take a deal that likely saved most of
Merrill's 60,000-plus workers.
And yet now - with the feds organizing a bailout and banning short-selling, the practice of betting against a company in the stock market - Thain's decisiveness seems misplaced. Rather than acknowledging economic reality and selling his firm, he could have waited for a handout and Merrill could have lived to see another day, it now appears.
Dodging the tough calls
Thain's rivals seem to be reaping the rewards of expanded federal largesse. Morgan Stanley, after plunging as low as $16 a share in panicked trading Wednesday afternoon, has recovered to the low $30s, possibly forestalling the need for the firm to find a merger partner such as Wachovia (WB, Fortune 500).
CEO John Mack, who responded to his firm's plunge with a memo to employees blaming short-sellers, surely likes the way this week has turned out.
But for the rest of us, the feds' rush to defend teetering financial firms only defers the tough decisions that will need to be made before this crisis subsides - at the expense, perhaps, of repeating Japan's so-called lost decade of economic stagnance after its property bubble collapsed around 1990.
History shows that setting up bad banks without forcing financial firms' managers to confront their problems won't solve anything.
"This seems to us," Bernstein writes, "to be a very Japanese approach to solving a credit crisis."
DON'T FORGET TO CLICK ON RELATED STORES (SEE TOP OF PAGE, TO CLICK ON ITEMS) THIS IS A HISTORY MAKING EVENT... AND WE HOPE IT WORKS. Gloria
Now, We're Bailing Out Foreign Banks to Save American Jobs
Sunday, September 21, 2008
Bailout Eligibility Expanded to Foreign Institutions
by CalculatedRisk
Here is a paragraph from the Treasury Fact Sheet released last night:
Asset and Institutional Eligibility for the Program. To qualify for the program, assets must have been originated or issued on or before September 17, 2008.
Participating financial institutions must have significant operations in the U.S., unless the Secretary makes a determination, in consultation with the Chairman of the Federal Reserve, that broader eligibility is necessary to effectively stabilize financial markets.
So this bailout covers any securities issued on or before last week!
Why would we be bailing out activity from this year? Or even after Feb 2007 when the subprime crisis woke everyone up?
I'd argue for an even earlier date ...But the second sentence is even more surprising: eligibility has been changed from "financial institution having its headquarters in the United States" to "significant operations in the U.S." - and even "broader eligibility" if Paulson so decides.
According to this fact sheet, under the Paulson Plan, U.S. taxpayers may bailout foreign financial institutions and even foreign governments.
Update: Paulson confirms on TV, via Reuters:
Paulson: Foreign banks can use U.S. rescue plan
Treasury Secretary Henry Paulson said Sunday that foreign banks will be able to unload bad financial assets under a $700 billion U.S. proposal aimed at restoring order during a devastating financial crisis.
"Yes, and they should. Because ... if a financial institution has business operations in the United States, hires people in the United States, if they are clogged with illiquid assets, they have the same impact on the American people as any other institution," Paulson said on ABC television's "This Week with George Stephanopolous."
Don't forget to go to other pages and read the related posts! (See top of page for links) This is a major undertaking for the U.S. Government and Wall Street...and if it doesn't work, the US will be in serious financial straits. Gloria
Bailout Eligibility Expanded to Foreign Institutions
by CalculatedRisk
Here is a paragraph from the Treasury Fact Sheet released last night:
Asset and Institutional Eligibility for the Program. To qualify for the program, assets must have been originated or issued on or before September 17, 2008.
Participating financial institutions must have significant operations in the U.S., unless the Secretary makes a determination, in consultation with the Chairman of the Federal Reserve, that broader eligibility is necessary to effectively stabilize financial markets.
So this bailout covers any securities issued on or before last week!
Why would we be bailing out activity from this year? Or even after Feb 2007 when the subprime crisis woke everyone up?
I'd argue for an even earlier date ...But the second sentence is even more surprising: eligibility has been changed from "financial institution having its headquarters in the United States" to "significant operations in the U.S." - and even "broader eligibility" if Paulson so decides.
According to this fact sheet, under the Paulson Plan, U.S. taxpayers may bailout foreign financial institutions and even foreign governments.
Update: Paulson confirms on TV, via Reuters:
Paulson: Foreign banks can use U.S. rescue plan
Treasury Secretary Henry Paulson said Sunday that foreign banks will be able to unload bad financial assets under a $700 billion U.S. proposal aimed at restoring order during a devastating financial crisis.
"Yes, and they should. Because ... if a financial institution has business operations in the United States, hires people in the United States, if they are clogged with illiquid assets, they have the same impact on the American people as any other institution," Paulson said on ABC television's "This Week with George Stephanopolous."
Don't forget to go to other pages and read the related posts! (See top of page for links) This is a major undertaking for the U.S. Government and Wall Street...and if it doesn't work, the US will be in serious financial straits. Gloria
The BAILOUT Plan: Bush Wants $700 Billion to Purchase Bad Mortgages
By Associated Press Saturday, September 20, 2008
WASHINGTON - The Bush administration is asking Congress to let the government buy $700 billion in toxic mortgages in the largest financial bailout since the Great Depression, according to a draft of the plan obtained today by The Associated Press.
The plan would give the government broad power to buy the bad debt of any U.S. financial institution for the next two years. It would raise the statutory limit on the national debt from $10.6 trillion to $11.3 trillion to make room for the massive rescue. The proposal does not specify what the government would get in return from financial companies for the federal assistance.
"We’re going to work with Congress to get a bill done quickly," President Bush said at the White House. Without discussing details of the plan, he said, "This is a big package because it was a big problem."
The White House and congressional leaders hoped the developing legislation could pass as early as next week.
Administration officials and members of Congress were to negotiate throughout the weekend. The plan is designed to let faltering financial institutions unload their distressed mortgage-related assets on the government, and in turn the taxpayer, in a bid to avoid dire economic consequences.
Bush said he worried the financial troubles "could ripple throughout" the economy and affect average citizens. "The risk of doing nothing far outweighs the risk of the package, and over time we’re going to get a lot of the money back."
He added, "People are beginning to doubt our system, people were losing confidence and I understand it’s important to have confidence in our financial system."
"In my judgment, based upon the advice of a lot of people who know how markets work, this problem wasn’t going to be contained to just the financial community," the president said. He said he was concerned about "Main Street" and that what happens on "Wall Street" affects "Main Street."
Sen. Chuck Schumer, D-N.Y., called the proposal "a good foundation," but raised concerns it "includes no visible protection for taxpayers or homeowners."
Democrats are insisting the rescue include mortgage help to let struggling homeowners avoid foreclosures. They also are also considering attaching additional middle-class assistance to the legislation despite a request from Bush to avoid adding controversial items that could delay action. An expansion of jobless benefits was one possibility.
Asked about the chances of adding such items, Bush sidestepped the question, saying only that now was not the time for political posturing. "The cleaner the better," he said about legislation he hopes Congress sends back to him at the White House.
If passed by Congress, the plan would give the Treasury secretary broad power to buy and sell the mortgage-related investments without any additional involvement by lawmakers. The proposal, however, would require that the congressional committees with oversight on budget, tax and financial services issues be briefed within three months of the government’s first use of the rescue power, and every six months after that.
While the proposal contains no requirement that the government receive anything from banks in return for unloading their bad assets, it would allow the Treasury Department to designate financial institutions as "agents of the government," and mandate that they perform any "reasonable duties" that might entail.
In a briefing to lawmakers Friday, Paulson and Federal Reserve Chairman Ben Bernanke painted a grave picture of an economy on the edge of a major recession and telling them that action was urgent and imperative.
In a session with House Democrats, they described a plan where the government would in essence set up reverse auctions, putting up money for a class of distressed assets — such as loans that are delinquent but not in default — and financial institutions would compete for how little they would accept for the investments, said Rep. Brad Sherman, D-Calif., who participated in the conference call.
"You give them good cash; they give you the worst of the worst," Sherman said. A critic of the plan, he complained that Bush and his economic advisers were trying to panic lawmakers into rubber-stamping it.
Paulson said the new troubled-asset relief program must be large enough to have the necessary impact while protecting taxpayers as much as possible.
"I am convinced that this bold approach will cost American families far less than the alternative — a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion," Paulson said. "The financial security of all Americans ... depends on our ability to restore our financial institutions to a sound footing."
Administration officials hoped the rescue plan could be finalized this weekend, to lend calm to Monday morning’s market openings, said Keith Hennessey, the director of the president’s economic council.
The goal is to have something passed by Congress by the end of next week, when lawmakers recess for the elections.
WASHINGTON - The Bush administration is asking Congress to let the government buy $700 billion in toxic mortgages in the largest financial bailout since the Great Depression, according to a draft of the plan obtained today by The Associated Press.
The plan would give the government broad power to buy the bad debt of any U.S. financial institution for the next two years. It would raise the statutory limit on the national debt from $10.6 trillion to $11.3 trillion to make room for the massive rescue. The proposal does not specify what the government would get in return from financial companies for the federal assistance.
"We’re going to work with Congress to get a bill done quickly," President Bush said at the White House. Without discussing details of the plan, he said, "This is a big package because it was a big problem."
The White House and congressional leaders hoped the developing legislation could pass as early as next week.
Administration officials and members of Congress were to negotiate throughout the weekend. The plan is designed to let faltering financial institutions unload their distressed mortgage-related assets on the government, and in turn the taxpayer, in a bid to avoid dire economic consequences.
Bush said he worried the financial troubles "could ripple throughout" the economy and affect average citizens. "The risk of doing nothing far outweighs the risk of the package, and over time we’re going to get a lot of the money back."
He added, "People are beginning to doubt our system, people were losing confidence and I understand it’s important to have confidence in our financial system."
"In my judgment, based upon the advice of a lot of people who know how markets work, this problem wasn’t going to be contained to just the financial community," the president said. He said he was concerned about "Main Street" and that what happens on "Wall Street" affects "Main Street."
Sen. Chuck Schumer, D-N.Y., called the proposal "a good foundation," but raised concerns it "includes no visible protection for taxpayers or homeowners."
Democrats are insisting the rescue include mortgage help to let struggling homeowners avoid foreclosures. They also are also considering attaching additional middle-class assistance to the legislation despite a request from Bush to avoid adding controversial items that could delay action. An expansion of jobless benefits was one possibility.
Asked about the chances of adding such items, Bush sidestepped the question, saying only that now was not the time for political posturing. "The cleaner the better," he said about legislation he hopes Congress sends back to him at the White House.
If passed by Congress, the plan would give the Treasury secretary broad power to buy and sell the mortgage-related investments without any additional involvement by lawmakers. The proposal, however, would require that the congressional committees with oversight on budget, tax and financial services issues be briefed within three months of the government’s first use of the rescue power, and every six months after that.
While the proposal contains no requirement that the government receive anything from banks in return for unloading their bad assets, it would allow the Treasury Department to designate financial institutions as "agents of the government," and mandate that they perform any "reasonable duties" that might entail.
In a briefing to lawmakers Friday, Paulson and Federal Reserve Chairman Ben Bernanke painted a grave picture of an economy on the edge of a major recession and telling them that action was urgent and imperative.
In a session with House Democrats, they described a plan where the government would in essence set up reverse auctions, putting up money for a class of distressed assets — such as loans that are delinquent but not in default — and financial institutions would compete for how little they would accept for the investments, said Rep. Brad Sherman, D-Calif., who participated in the conference call.
"You give them good cash; they give you the worst of the worst," Sherman said. A critic of the plan, he complained that Bush and his economic advisers were trying to panic lawmakers into rubber-stamping it.
Paulson said the new troubled-asset relief program must be large enough to have the necessary impact while protecting taxpayers as much as possible.
"I am convinced that this bold approach will cost American families far less than the alternative — a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion," Paulson said. "The financial security of all Americans ... depends on our ability to restore our financial institutions to a sound footing."
Administration officials hoped the rescue plan could be finalized this weekend, to lend calm to Monday morning’s market openings, said Keith Hennessey, the director of the president’s economic council.
The goal is to have something passed by Congress by the end of next week, when lawmakers recess for the elections.
The Pary's Over. Yes? No? Maybe?
By Patrick J. Buchanan19/09/08 "CS" -- -
The Crash of 2008, which is now wiping out trillions of dollars of our people's wealth, is, like the Crash of 1929, likely to mark the end of one era and the onset of another.
The new era will see a more sober and much diminished America. The "Omnipower" and "Indispensable Nation" we heard about in all the hubris and braggadocio following our Cold War victory is history.
Seizing on the crisis, the left says we are witnessing the failure of market economics, a failure of conservatism.
This is nonsense. What we are witnessing is the collapse of Gordon Gecko ("Greed Is Good!") capitalism. What we are witnessing is what happens to a prodigal nation that ignores history, and forgets and abandons the philosophy and principles that made it great.
A true conservative cherishes prudence and believes in fiscal responsibility, balanced budgets and a self-reliant republic. He believes in saving for retirement and a rainy day, in deferred gratification, in not buying on credit what you cannot afford, in living within your means.
Is that really what got Wall Street and us into this mess — that we followed too religiously the gospel of Robert Taft and Russell Kirk?
"Government must save us!" cries the left, as ever. Yet, who got us into this mess if not the government — the Fed with its easy money, Bush with his profligate spending, and Congress and the SEC by liberating Wall Street and failing to step in and stop the drunken orgy?
For years, we Americans have spent more than we earned. We save nothing. Credit card debt, consumer debt, auto debt, mortgage debt, corporate debt — all are at record levels. And with pensions and savings being wiped out, much of that debt will never be repaid.
Our standard of living is inevitably going to fall. For foreigners will not forever buy our bonds or lend us more money if they rightly fear that they will be paid back, if at all, in cheaper dollars.
We are going to have to learn to live again without our means.
The party's over
Up through World War II, we followed the Hamiltonian idea that America must remain economically independent of the world in order to remain politically independent.
But this generation decided that was yesterday's bromide and we must march bravely forward into a Global Economy, where we all depend on one another. American companies morphed into "global companies" and moved plants and factories to Mexico, Asia, China and India, and we began buying more cheaply from abroad what we used to make at home: shoes, clothes, bikes, cars, radios, TVs, planes, computers.
As the trade deficits began inexorably to rise to 6 percent of GDP, we began vast borrowing from abroad to continue buying from abroad.
At home, propelled by tax cuts, war in Iraq and an explosion in social spending, surpluses vanished and deficits reappeared and began to rise. The dollar began to sink, and gold began to soar.
Yet, still, the promises of the politicians come. Barack Obama will give us national health insurance and tax cuts for all but that 2 percent of the nation that already carries 50 percent of the federal income tax load.
John McCain is going to cut taxes, expand the military, move NATO into Georgia and Ukraine, confront Russia and force Iran to stop enriching uranium or "bomb, bomb, bomb," with Joe Lieberman as wartime consigliere.
Who are we kidding?
What we are witnessing today is how empires end.
The Last Superpower is unable to defend its borders, protect its currency, win its wars or balance its budget. Medicare and Social Security are headed for the cliff with unfunded liabilities in the tens of trillions of dollars.
What we are witnessing today is nothing less than a Katrina-like failure of government, of our political class, and of democracy itself, casting a cloud over the viability and longevity of the system.
Notice who is managing the crisis. Not our elected leaders. Nancy Pelosi says she had nothing to do with it. Congress is paralyzed and heading home. President Bush is nowhere to be seen.
Hank Paulson of Goldman Sachs and Ben Bernanke of the Fed chose to bail out Bear Sterns but let Lehman go under. They decided to nationalize Fannie and Freddie at a cost to taxpayers of hundreds of billions, putting the U.S. government behind $5 trillion in mortgages. They decided to buy AIG with $85 billion rather than see the insurance giant sink beneath the waves.
An unelected financial elite is now entrusted with the assignment of getting us out of a disaster into which an unelected financial elite plunged the nation. We are just spectators.
What the Greatest Generation handed down to us — the richest, most powerful, most self-sufficient republic in history, with the highest standard of living any nation had ever achieved — the baby boomers, oblivious and self-indulgent to the end, have frittered away.
To find out more about Patrick Buchanan, and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate web page at http://us.rd.yahoo.com/dailynews/uc_crpbux/cm_uc_crpbux/storytext/op_337446/29163491/SIG=10pem51ah/*http://www.creators.com.
.
.
.
The Crash of 2008, which is now wiping out trillions of dollars of our people's wealth, is, like the Crash of 1929, likely to mark the end of one era and the onset of another.
The new era will see a more sober and much diminished America. The "Omnipower" and "Indispensable Nation" we heard about in all the hubris and braggadocio following our Cold War victory is history.
Seizing on the crisis, the left says we are witnessing the failure of market economics, a failure of conservatism.
This is nonsense. What we are witnessing is the collapse of Gordon Gecko ("Greed Is Good!") capitalism. What we are witnessing is what happens to a prodigal nation that ignores history, and forgets and abandons the philosophy and principles that made it great.
A true conservative cherishes prudence and believes in fiscal responsibility, balanced budgets and a self-reliant republic. He believes in saving for retirement and a rainy day, in deferred gratification, in not buying on credit what you cannot afford, in living within your means.
Is that really what got Wall Street and us into this mess — that we followed too religiously the gospel of Robert Taft and Russell Kirk?
"Government must save us!" cries the left, as ever. Yet, who got us into this mess if not the government — the Fed with its easy money, Bush with his profligate spending, and Congress and the SEC by liberating Wall Street and failing to step in and stop the drunken orgy?
For years, we Americans have spent more than we earned. We save nothing. Credit card debt, consumer debt, auto debt, mortgage debt, corporate debt — all are at record levels. And with pensions and savings being wiped out, much of that debt will never be repaid.
Our standard of living is inevitably going to fall. For foreigners will not forever buy our bonds or lend us more money if they rightly fear that they will be paid back, if at all, in cheaper dollars.
We are going to have to learn to live again without our means.
The party's over
Up through World War II, we followed the Hamiltonian idea that America must remain economically independent of the world in order to remain politically independent.
But this generation decided that was yesterday's bromide and we must march bravely forward into a Global Economy, where we all depend on one another. American companies morphed into "global companies" and moved plants and factories to Mexico, Asia, China and India, and we began buying more cheaply from abroad what we used to make at home: shoes, clothes, bikes, cars, radios, TVs, planes, computers.
As the trade deficits began inexorably to rise to 6 percent of GDP, we began vast borrowing from abroad to continue buying from abroad.
At home, propelled by tax cuts, war in Iraq and an explosion in social spending, surpluses vanished and deficits reappeared and began to rise. The dollar began to sink, and gold began to soar.
Yet, still, the promises of the politicians come. Barack Obama will give us national health insurance and tax cuts for all but that 2 percent of the nation that already carries 50 percent of the federal income tax load.
John McCain is going to cut taxes, expand the military, move NATO into Georgia and Ukraine, confront Russia and force Iran to stop enriching uranium or "bomb, bomb, bomb," with Joe Lieberman as wartime consigliere.
Who are we kidding?
What we are witnessing today is how empires end.
The Last Superpower is unable to defend its borders, protect its currency, win its wars or balance its budget. Medicare and Social Security are headed for the cliff with unfunded liabilities in the tens of trillions of dollars.
What we are witnessing today is nothing less than a Katrina-like failure of government, of our political class, and of democracy itself, casting a cloud over the viability and longevity of the system.
Notice who is managing the crisis. Not our elected leaders. Nancy Pelosi says she had nothing to do with it. Congress is paralyzed and heading home. President Bush is nowhere to be seen.
Hank Paulson of Goldman Sachs and Ben Bernanke of the Fed chose to bail out Bear Sterns but let Lehman go under. They decided to nationalize Fannie and Freddie at a cost to taxpayers of hundreds of billions, putting the U.S. government behind $5 trillion in mortgages. They decided to buy AIG with $85 billion rather than see the insurance giant sink beneath the waves.
An unelected financial elite is now entrusted with the assignment of getting us out of a disaster into which an unelected financial elite plunged the nation. We are just spectators.
What the Greatest Generation handed down to us — the richest, most powerful, most self-sufficient republic in history, with the highest standard of living any nation had ever achieved — the baby boomers, oblivious and self-indulgent to the end, have frittered away.
To find out more about Patrick Buchanan, and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate web page at http://us.rd.yahoo.com/dailynews/uc_crpbux/cm_uc_crpbux/storytext/op_337446/29163491/SIG=10pem51ah/*http://www.creators.com.
.
.
.
Congress Pledges Action
Rescue Talks Coming With White House as Differences Surface
By GREG HITT SEPTEMBER 20, 2008, Wall Street Journal
WASHINGTON -- Congressional leaders Friday vowed speedy action on a rescue plan for U.S. financial markets. But dangers lurked on Capitol Hill, as Democrats pushed for additional measures to aid the economy and conservative Republicans griped about the huge government bailout.
With a little more than 40 days to go before an election where control of both the White House and Congress are up for grabs, some lawmakers suggested the market-rescue package should offer fresh relief to troubled borrowers.
Doing so, however, could turn the bill into a "Christmas tree," by hanging unrelated measures on it and perhaps endanger its passage. Meanwhile, finance-industry lobbyists began fighting to block certain proposals, such as limits to executive pay.
Lawmakers from both parties and Bush administration officials plan negotiations over the weekend to pull together details of the program. A centerpiece of the proposal will be a new government authority empowered to buy hundreds of billions of dollars in bad securities and loans from troubled financial institutions.
The White House is urging Congress to act rapidly to calm turbulent markets. Democratic leaders said they hope to push the measure through the House and Senate by the end of next week.
House Speaker Nancy Pelosi said Democrats "are committed to quick, bipartisan action." A spokesman for Senate Majority Leader Harry Reid said the Nevada Democrat intends to "move heaven and earth" to get the bill done, though in a private meeting late Thursday night he was less sanguine, warning it can take a couple of days in the Senate "to pass a bill to flush the toilet," congressional officials said.
Just a few days ago, Mrs. Pelosi and Mr. Reid were saying they didn't expect major action on financial-markets issues before the current session ends. But that turned around overnight on Thursday after briefings from Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and others.
Senate Banking Committee Chairman Chris Dodd (D., Conn.) said the looming threats to the U.S. economy outlined by Mr. Paulson in a meeting with lawmakers late Thursday have galvanized lawmakers. "I've been here 28 years. I've never been in a more sobering moment," Mr. Dodd said Friday.
Until Friday, Capitol Hill was mired in partisan bickering over gas prices, an ethics inquiry into a top Democratic committee chairman and finger-pointing over the state of the teetering economy. But those issues have receded in the face of the crisis in the credit markets.
"Members of Congress need to set politics aside," said Missouri Rep. Roy Blunt, the House's second-ranking Republican, in comments echoed across Capitol Hill.
"We're all on the same page," said Sen. Jon Tester (D., Mont.), after emerging from a closed-door meeting of the Senate Banking Committee. "We understand this is bigger than anything we've faced in a long, long time."
New Hampshire Sen. Judd Gregg, the senior Republican on the Senate Budget Committee, pegged the cost of the bailout at "somewhere in the $500 billion range." Alabama's Richard Shelby, the senior Republican on the Senate Banking Committee, said the final figure could be closer to "a trillion dollars."
For Democrats, the unfolding crisis is forcing difficult choices about the party's priorities ahead of the election. Democratic leaders want the White House to support additional measures to stimulate the economy, such as expanded jobless benefits. Mrs. Pelosi pressed Mr. Paulson on that issue Friday.
At this point, the administration is deflecting the Democratic overtures. But the unfolding crisis could give Democrats new leverage to wring concessions from the White House: either in a must-pass budget bill later this month or the emerging financial-services bill.
Mr. Dodd said the financial-services bill shouldn't become a "Christmas tree" but should reflect Democratic priorities. One idea bandied about among Democrats would create a special funding mechanism that would help homeowners get out from underneath troubled mortgages.
Another proposal would give federal bankruptcy judges enhanced authority to adjust mortgages to prevent borrowers from tilting into foreclosure. Banking-industry lobbyists say they will fight proposals to amend mortgages in bankruptcy.
Mr. Tester said the goal is to make sure "we don't do something that makes Wall Street happy, but doesn't take care of Main Street."
House Republican Leader John Boehner (R., Ohio) urged Congress and the administration to keep the bill "as simple and straightforward as possible," warning any attempt to "score political points or fit a partisan agenda" into the measure will only delay action.
So far, no one on Capitol Hill was moving to openly oppose the administration plan. But in Republican ranks, conservatives were growing restless with the steady drumbeat of government intervention.
By GREG HITT SEPTEMBER 20, 2008, Wall Street Journal
WASHINGTON -- Congressional leaders Friday vowed speedy action on a rescue plan for U.S. financial markets. But dangers lurked on Capitol Hill, as Democrats pushed for additional measures to aid the economy and conservative Republicans griped about the huge government bailout.
With a little more than 40 days to go before an election where control of both the White House and Congress are up for grabs, some lawmakers suggested the market-rescue package should offer fresh relief to troubled borrowers.
Doing so, however, could turn the bill into a "Christmas tree," by hanging unrelated measures on it and perhaps endanger its passage. Meanwhile, finance-industry lobbyists began fighting to block certain proposals, such as limits to executive pay.
Lawmakers from both parties and Bush administration officials plan negotiations over the weekend to pull together details of the program. A centerpiece of the proposal will be a new government authority empowered to buy hundreds of billions of dollars in bad securities and loans from troubled financial institutions.
The White House is urging Congress to act rapidly to calm turbulent markets. Democratic leaders said they hope to push the measure through the House and Senate by the end of next week.
House Speaker Nancy Pelosi said Democrats "are committed to quick, bipartisan action." A spokesman for Senate Majority Leader Harry Reid said the Nevada Democrat intends to "move heaven and earth" to get the bill done, though in a private meeting late Thursday night he was less sanguine, warning it can take a couple of days in the Senate "to pass a bill to flush the toilet," congressional officials said.
Just a few days ago, Mrs. Pelosi and Mr. Reid were saying they didn't expect major action on financial-markets issues before the current session ends. But that turned around overnight on Thursday after briefings from Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and others.
Senate Banking Committee Chairman Chris Dodd (D., Conn.) said the looming threats to the U.S. economy outlined by Mr. Paulson in a meeting with lawmakers late Thursday have galvanized lawmakers. "I've been here 28 years. I've never been in a more sobering moment," Mr. Dodd said Friday.
Until Friday, Capitol Hill was mired in partisan bickering over gas prices, an ethics inquiry into a top Democratic committee chairman and finger-pointing over the state of the teetering economy. But those issues have receded in the face of the crisis in the credit markets.
"Members of Congress need to set politics aside," said Missouri Rep. Roy Blunt, the House's second-ranking Republican, in comments echoed across Capitol Hill.
"We're all on the same page," said Sen. Jon Tester (D., Mont.), after emerging from a closed-door meeting of the Senate Banking Committee. "We understand this is bigger than anything we've faced in a long, long time."
New Hampshire Sen. Judd Gregg, the senior Republican on the Senate Budget Committee, pegged the cost of the bailout at "somewhere in the $500 billion range." Alabama's Richard Shelby, the senior Republican on the Senate Banking Committee, said the final figure could be closer to "a trillion dollars."
For Democrats, the unfolding crisis is forcing difficult choices about the party's priorities ahead of the election. Democratic leaders want the White House to support additional measures to stimulate the economy, such as expanded jobless benefits. Mrs. Pelosi pressed Mr. Paulson on that issue Friday.
At this point, the administration is deflecting the Democratic overtures. But the unfolding crisis could give Democrats new leverage to wring concessions from the White House: either in a must-pass budget bill later this month or the emerging financial-services bill.
Mr. Dodd said the financial-services bill shouldn't become a "Christmas tree" but should reflect Democratic priorities. One idea bandied about among Democrats would create a special funding mechanism that would help homeowners get out from underneath troubled mortgages.
Another proposal would give federal bankruptcy judges enhanced authority to adjust mortgages to prevent borrowers from tilting into foreclosure. Banking-industry lobbyists say they will fight proposals to amend mortgages in bankruptcy.
Mr. Tester said the goal is to make sure "we don't do something that makes Wall Street happy, but doesn't take care of Main Street."
House Republican Leader John Boehner (R., Ohio) urged Congress and the administration to keep the bill "as simple and straightforward as possible," warning any attempt to "score political points or fit a partisan agenda" into the measure will only delay action.
So far, no one on Capitol Hill was moving to openly oppose the administration plan. But in Republican ranks, conservatives were growing restless with the steady drumbeat of government intervention.
What The Feds and Wall Street Are Proposing
The federal government is asking Congress for $700 billion to buy up distressed assets as part of its plan to help halt the worst financial crisis since the 1930s.
The Treasury Department sent Congress legislative language last night asking for broad authority to buy assets from U.S. financial institutions. The request is just two-and-a-half pages and contains a broad outline of how this new entity would function. The government wanted to keep the plan simple, in part because it wants the flexibility to adjust what its doing as market conditions change, a person familiar with the matter said. (Associated Press )
Among the things the government is asking for is the authority to hire asset managers to oversee the buying of assets. The bare-bones request may irk Congress, which is already expressing concerns about the plan. It could present an opportunity for Congress to stack the bill with other provisions, such as more housing relief.
The proposal would give the Treasury secretary significant leeway in buying, selling and holding residential or commercial mortgages, as well as "any securities, obligations or other instruments that are based on or related to such mortgages."
The only limitation would be that purchases couldn't exceed $700 billion outstanding at any one time. That figure compares with the $515 billion President George W. Bush included in his fiscal 2009 base budget request for the Department of Defense. The plan also calls for an increase in the public debt limit, boosting it to $11.3 trillion.
Congress already voted once this year to increase the debt limit, to $10.6 trillion as part of omnibus housing legislation that included broader federal authority over Fannie Mae and Freddie Mac. The two mortgage firms have since fallen under government control.
Democrats will work with the Bush administration on enacting legislation swiftly, but will insist on adding measures to protect taxpayers and tighten regulation of the industry, said House Speaker Nancy Pelosi (D., Calif.).
"We will strengthen the proposal by ensuring that the government is accountable to the taxpayers in any future actions under this broad grant of authority, implementing strong oversight mechanisms, and establishing fast-track authority for the Congress to act on responsible regulatory reform," she said.
Other leading congressional Democrats struck similar themes in statements issued Saturday. Senate Majority Leader Harry Reid (D., Nev.) struck a more critical tone, saying that "while the Bush proposal raises some serious issues, we need to resolve them quickly."
Sen. Charles Schumer (D., N.Y.) in a statement released by his office, offered a mixed reaction to the proposal. "This is a good foundation of a plan that can stabilize markets quickly," he said. "But it includes no visible protection for taxpayers or homeowners. We look forward to talking to Treasury to see what, if anything, they have in mind in these two areas."
Lawmakers have said they want to add additional provisions to the Treasury proposal, including more help for cash-strapped homeowners facing foreclosure. Financial Services Chairman Barney Frank (D., Mass.) has floated the idea of including limits on executive compensation for firms that take advantage of government aid.
Republican and Democratic staff from the Senate Banking Committee and the House Financial Services Committee met with Treasury staff at noon to discuss the proposal. No lawmakers attended the meeting.
Aides were "trying to understand this and get our hands around it" because "a lot of aspects of this are unprecedented," according to one senior Democratic aide who was present at the meeting.
Lawmakers want to make sure that taxpayers will be protected and that "we're not misfiring," the aide added.
Treasury 'Fact Sheet'
The Treasury Department on Saturday evening issued a "fact sheet" on the proposal, saying, "Removing troubled assets will begin to restore the strength of our financial system so it can again finance economic growth."
Congressional Republicans have sent early signals that they oppose the addition of other measures to the Treasury proposal, such as an economic stimulus package pushed by Democrats. House Minority Leader John Boehner (R., Ohio) said in a statement that "efforts to exploit this crisis for political leverage or partisan quid pro quo will only delay the economic stability that families, seniors, and small businesses deserve."
House and Senate lawmakers, working hand-in-hand with the Bush administration, are expected to work throughout the weekend on finalizing the details of the plan. Congressional leaders have targeted a vote on the comprehensive plan for the coming week, though that will depend on the ability of the White House and Congress to agree on a final product.
The proposal would expire after two years but would allow the government to hold the assets purchased from financial firms -- which must be headquartered in the U.S. -- for as long as is deemed necessary by the Treasury. Any assets purchased through the program would have to be tied to mortgages originated before Sept. 17 of this year.
The plan offered to Congress also gives the Treasury legal immunity from any lawsuits. "Decisions by the secretary pursuant to the authority are non-reviewable … and may not be reviewed by any court of law or any administrative agency," the proposal says.
The proposal doesn't detail how Treasury would manage the assets, but does give Paulson the authority to hire private financial institutions to conduct the program, as well as to create other entities to purchase mortgage assets and issue debt.
"Treasury will have full discretion over the management of the assets as well as the exercise of any rights received in connection with the purchase of the assets," the Treasury fact sheet said.
The Treasury "fact sheet" suggests very broad powers for the Treasury secretary under the proposal. The Treasury secretary "will have the discretion, in consultation with the Chairman of the Federal Reserve, to purchase other assets, as deemed necessary to effectively stabilize financial markets," the fact sheet said.
"Treasury may sell the assets at its discretion or may hold assets to maturity. Cash received from liquidating the assets, including any additional returns, will be returned to Treasury's general fund for the benefit of American taxpayers," the fact sheet said.
Devil Is in the Details
The nation's top economic generals pressed Congress to move with extraordinary speed -- by next week -- to authorize a plan to bail out the U.S. financial system, but are still working to iron out enormously complicated details likely to generate controversy.
Markets soared Friday for a second straight day on news of the discussions. The Dow Jones Industrial Average rose 368.75, or 3.35%. Financial stocks led the rebound. Stock markets in Asia and Europe also rose sharply. The news also helped improve credit markets: Investors poured out of the ultra-safe Treasury bond market Friday, sending yields on the three-month T-bill up to 1% after briefly touching 0% on Wednesday.
Still, though members of Congress briefed on the idea generally voiced approval, lobbyists, policymakers and financial-services executives geared up for a fight over the details. (See related story.)
Among the measures announced Friday, the Treasury temporarily extended insurance, similar to that on bank deposits, to money-market mutual funds and the Federal Reserve said it would buy commercial paper from the funds. The Securities and Exchange Commission, meanwhile, banned short-selling of 799 financial stocks -- a financial bet that they will fall in price -- for at least 10 days. And the Treasury said it -- along with mortgage giants Fannie Mae and Freddie Mac, recently taken over by the government -- would step up their purchases of mortgage-backed securities to help keep the housing market afloat.
The most ambitious part of the government plan is to create a new entity to purchase impaired assets from financial firms. The process could work as a type of reverse auction, in which the government would buy from the institution that sells its assets for the lowest bid.
However, the government may find itself in a quandary: Does it pay more than fair-market value for hard-to-assess distressed assets, putting taxpayers on the hook for any losses? Or does it drive a hard bargain, buying for pennies on the dollar?
The latter approach would further hurt financial institutions, since they would have to write down the losses and take additional hits to their balance sheets. The Treasury department, which hasn't commented on specifics about the plan, is expected to propose issuing debt in $50 billion tranches to fund the purchases.
"I am convinced that this bold approach will cost American families far less than the alternative -- a continuing series of financial-institution failures and frozen credit markets unable to fund economic expansion," Mr. Paulson said at a morning press conference.
Others aren't sold. Douglas Elmendorf, a senior fellow at Brookings Institution and former Treasury official, said while inaction is a risk, the Treasury's plan could cost taxpayers a huge amount of money. "This approach saddles taxpayers with significant downside risk but limited potential upside gain," Mr. Elmendorf said.
Broad, Systematic Approach
The moves are an effort to take a broad, systematic approach to the financial crisis after a series of incremental moves failed to stem the turmoil. The crisis has worsened over the past two weeks as credit downgrades, bad investments and falling stock prices have felled financial institutions such as Lehman Brothers Holdings Inc. and American International Group Inc., a huge insurer.
While the Treasury department awaits approval from Congress it is also moving to start buying up mortgage-backed securities through existing mechanisms. The Federal Housing Finance Agency, a division of government that is effectively running both Fannie Mae and Freddie Mac, immediately directed both companies to purchase more mortgage-backed securities to help fund lending markets.
The Treasury department also plans to expand a program it implemented in the wake of its takeover of Fannie and Freddie to buy up to $10 billion in mortgage-backed securities debt issued by the companies in the open market. The Federal Reserve and the SEC also acted to stem the crisis.
The Fed acted before U.S. markets opened, effectively coming to the rescue of the money-market mutual-fund industry. Worried that money-market mutual funds weren't liquid enough to handle a wave of redemptions from nervous investors, the Fed said it would use its so-called discount window to lend up to $230 billion to the industry -- via commercial banks -- against illiquid asset-backed commercial paper which is widely held by money-market funds.
The asset-backed commercial paper market went through severe strain last year, because of holdings of troubled subprime mortgage debt instruments. Fed staff say that isn't a problem for the industry now, and that most of the assets backing the instruments it will lend against are auto loans and credit-card loans. The paper the Fed is financing is high-rated and Fed staff don't see it as a money-losing step.
The central bank is taking on a potentially big risk: If these assets fall in value or default, it may be on the hook, because the Fed cannot claim anything other than collateral as repayment. Officials say the assets are safe and the move is a temporary measure to provide liquidity to the market.
In another bid to provide liquidity, The Fed Friday, said it would buy short-term debt issued by Fannie Mae, Freddie Mac and Federal Home Loan Banks through primary dealers. The Fed said it would buy up to $69 billion of these securities, called discount notes, to ease the crunch in the market.
The SEC ban on short selling of some financial stocks -- an attempt to stem some of the worst stock-market slides in years -- is effective immediately and will last 10 days, but could be extended for up to 30 days.
In short selling, traders borrow shares of stock and sell them, hoping the price of the shares declines and they can profit by buying them back at a lower price.
The SEC said it was acting in concert with the U.K.'s Financial Services Authority. The FSA said Thursday it would ban short selling in financial stocks until January, and would review the ban in 30 days.
Regulators in other countries quickly followed suit by tightening their own rules on short selling, including Ireland, Australia and France.
Bank of France governor Christian Noyer said Friday that the country's stock-market watchdog Autorité des Marchés Financiers would move to impose new restrictions on short-selling.
Commercial banks expressed skepticism about the Treasury department plan. They fear it may prompt investors to pull their money out of banks and place it in money-market mutual funds, which often have higher rates of return than commercial bank savings accounts.
The Independent Community Bankers of America in a statement said it was extremely concerned about the Treasury's announced mutual-fund guaranty program. "ICBA cautions
Treasury not to propose any solution to Wall Street's turmoil that will drain funding from community banks, constraining their ability to fund local economic activity and growth and serve local communities across the nation."
—Jon Hilsenrath, Kara Scannell, Peter McKay, Joellen Perry, Elizabeth Rappaport, James R. Hagerty, Corey Boles and Cassell Bryan-Low contributed to this article.
Write to Deborah Solomon at deborah.solomon@wsj.com, Michael R. Crittenden at michael.crittenden@dowjones.com and Damian Paletta at damian.paletta@wsj.com
.
.
The Treasury Department sent Congress legislative language last night asking for broad authority to buy assets from U.S. financial institutions. The request is just two-and-a-half pages and contains a broad outline of how this new entity would function. The government wanted to keep the plan simple, in part because it wants the flexibility to adjust what its doing as market conditions change, a person familiar with the matter said. (Associated Press )
Among the things the government is asking for is the authority to hire asset managers to oversee the buying of assets. The bare-bones request may irk Congress, which is already expressing concerns about the plan. It could present an opportunity for Congress to stack the bill with other provisions, such as more housing relief.
The proposal would give the Treasury secretary significant leeway in buying, selling and holding residential or commercial mortgages, as well as "any securities, obligations or other instruments that are based on or related to such mortgages."
The only limitation would be that purchases couldn't exceed $700 billion outstanding at any one time. That figure compares with the $515 billion President George W. Bush included in his fiscal 2009 base budget request for the Department of Defense. The plan also calls for an increase in the public debt limit, boosting it to $11.3 trillion.
Congress already voted once this year to increase the debt limit, to $10.6 trillion as part of omnibus housing legislation that included broader federal authority over Fannie Mae and Freddie Mac. The two mortgage firms have since fallen under government control.
Democrats will work with the Bush administration on enacting legislation swiftly, but will insist on adding measures to protect taxpayers and tighten regulation of the industry, said House Speaker Nancy Pelosi (D., Calif.).
"We will strengthen the proposal by ensuring that the government is accountable to the taxpayers in any future actions under this broad grant of authority, implementing strong oversight mechanisms, and establishing fast-track authority for the Congress to act on responsible regulatory reform," she said.
Other leading congressional Democrats struck similar themes in statements issued Saturday. Senate Majority Leader Harry Reid (D., Nev.) struck a more critical tone, saying that "while the Bush proposal raises some serious issues, we need to resolve them quickly."
Sen. Charles Schumer (D., N.Y.) in a statement released by his office, offered a mixed reaction to the proposal. "This is a good foundation of a plan that can stabilize markets quickly," he said. "But it includes no visible protection for taxpayers or homeowners. We look forward to talking to Treasury to see what, if anything, they have in mind in these two areas."
Lawmakers have said they want to add additional provisions to the Treasury proposal, including more help for cash-strapped homeowners facing foreclosure. Financial Services Chairman Barney Frank (D., Mass.) has floated the idea of including limits on executive compensation for firms that take advantage of government aid.
Republican and Democratic staff from the Senate Banking Committee and the House Financial Services Committee met with Treasury staff at noon to discuss the proposal. No lawmakers attended the meeting.
Aides were "trying to understand this and get our hands around it" because "a lot of aspects of this are unprecedented," according to one senior Democratic aide who was present at the meeting.
Lawmakers want to make sure that taxpayers will be protected and that "we're not misfiring," the aide added.
Treasury 'Fact Sheet'
The Treasury Department on Saturday evening issued a "fact sheet" on the proposal, saying, "Removing troubled assets will begin to restore the strength of our financial system so it can again finance economic growth."
Congressional Republicans have sent early signals that they oppose the addition of other measures to the Treasury proposal, such as an economic stimulus package pushed by Democrats. House Minority Leader John Boehner (R., Ohio) said in a statement that "efforts to exploit this crisis for political leverage or partisan quid pro quo will only delay the economic stability that families, seniors, and small businesses deserve."
House and Senate lawmakers, working hand-in-hand with the Bush administration, are expected to work throughout the weekend on finalizing the details of the plan. Congressional leaders have targeted a vote on the comprehensive plan for the coming week, though that will depend on the ability of the White House and Congress to agree on a final product.
The proposal would expire after two years but would allow the government to hold the assets purchased from financial firms -- which must be headquartered in the U.S. -- for as long as is deemed necessary by the Treasury. Any assets purchased through the program would have to be tied to mortgages originated before Sept. 17 of this year.
The plan offered to Congress also gives the Treasury legal immunity from any lawsuits. "Decisions by the secretary pursuant to the authority are non-reviewable … and may not be reviewed by any court of law or any administrative agency," the proposal says.
The proposal doesn't detail how Treasury would manage the assets, but does give Paulson the authority to hire private financial institutions to conduct the program, as well as to create other entities to purchase mortgage assets and issue debt.
"Treasury will have full discretion over the management of the assets as well as the exercise of any rights received in connection with the purchase of the assets," the Treasury fact sheet said.
The Treasury "fact sheet" suggests very broad powers for the Treasury secretary under the proposal. The Treasury secretary "will have the discretion, in consultation with the Chairman of the Federal Reserve, to purchase other assets, as deemed necessary to effectively stabilize financial markets," the fact sheet said.
"Treasury may sell the assets at its discretion or may hold assets to maturity. Cash received from liquidating the assets, including any additional returns, will be returned to Treasury's general fund for the benefit of American taxpayers," the fact sheet said.
Devil Is in the Details
The nation's top economic generals pressed Congress to move with extraordinary speed -- by next week -- to authorize a plan to bail out the U.S. financial system, but are still working to iron out enormously complicated details likely to generate controversy.
Markets soared Friday for a second straight day on news of the discussions. The Dow Jones Industrial Average rose 368.75, or 3.35%. Financial stocks led the rebound. Stock markets in Asia and Europe also rose sharply. The news also helped improve credit markets: Investors poured out of the ultra-safe Treasury bond market Friday, sending yields on the three-month T-bill up to 1% after briefly touching 0% on Wednesday.
Still, though members of Congress briefed on the idea generally voiced approval, lobbyists, policymakers and financial-services executives geared up for a fight over the details. (See related story.)
Among the measures announced Friday, the Treasury temporarily extended insurance, similar to that on bank deposits, to money-market mutual funds and the Federal Reserve said it would buy commercial paper from the funds. The Securities and Exchange Commission, meanwhile, banned short-selling of 799 financial stocks -- a financial bet that they will fall in price -- for at least 10 days. And the Treasury said it -- along with mortgage giants Fannie Mae and Freddie Mac, recently taken over by the government -- would step up their purchases of mortgage-backed securities to help keep the housing market afloat.
The most ambitious part of the government plan is to create a new entity to purchase impaired assets from financial firms. The process could work as a type of reverse auction, in which the government would buy from the institution that sells its assets for the lowest bid.
However, the government may find itself in a quandary: Does it pay more than fair-market value for hard-to-assess distressed assets, putting taxpayers on the hook for any losses? Or does it drive a hard bargain, buying for pennies on the dollar?
The latter approach would further hurt financial institutions, since they would have to write down the losses and take additional hits to their balance sheets. The Treasury department, which hasn't commented on specifics about the plan, is expected to propose issuing debt in $50 billion tranches to fund the purchases.
"I am convinced that this bold approach will cost American families far less than the alternative -- a continuing series of financial-institution failures and frozen credit markets unable to fund economic expansion," Mr. Paulson said at a morning press conference.
Others aren't sold. Douglas Elmendorf, a senior fellow at Brookings Institution and former Treasury official, said while inaction is a risk, the Treasury's plan could cost taxpayers a huge amount of money. "This approach saddles taxpayers with significant downside risk but limited potential upside gain," Mr. Elmendorf said.
Broad, Systematic Approach
The moves are an effort to take a broad, systematic approach to the financial crisis after a series of incremental moves failed to stem the turmoil. The crisis has worsened over the past two weeks as credit downgrades, bad investments and falling stock prices have felled financial institutions such as Lehman Brothers Holdings Inc. and American International Group Inc., a huge insurer.
While the Treasury department awaits approval from Congress it is also moving to start buying up mortgage-backed securities through existing mechanisms. The Federal Housing Finance Agency, a division of government that is effectively running both Fannie Mae and Freddie Mac, immediately directed both companies to purchase more mortgage-backed securities to help fund lending markets.
The Treasury department also plans to expand a program it implemented in the wake of its takeover of Fannie and Freddie to buy up to $10 billion in mortgage-backed securities debt issued by the companies in the open market. The Federal Reserve and the SEC also acted to stem the crisis.
The Fed acted before U.S. markets opened, effectively coming to the rescue of the money-market mutual-fund industry. Worried that money-market mutual funds weren't liquid enough to handle a wave of redemptions from nervous investors, the Fed said it would use its so-called discount window to lend up to $230 billion to the industry -- via commercial banks -- against illiquid asset-backed commercial paper which is widely held by money-market funds.
The asset-backed commercial paper market went through severe strain last year, because of holdings of troubled subprime mortgage debt instruments. Fed staff say that isn't a problem for the industry now, and that most of the assets backing the instruments it will lend against are auto loans and credit-card loans. The paper the Fed is financing is high-rated and Fed staff don't see it as a money-losing step.
The central bank is taking on a potentially big risk: If these assets fall in value or default, it may be on the hook, because the Fed cannot claim anything other than collateral as repayment. Officials say the assets are safe and the move is a temporary measure to provide liquidity to the market.
In another bid to provide liquidity, The Fed Friday, said it would buy short-term debt issued by Fannie Mae, Freddie Mac and Federal Home Loan Banks through primary dealers. The Fed said it would buy up to $69 billion of these securities, called discount notes, to ease the crunch in the market.
The SEC ban on short selling of some financial stocks -- an attempt to stem some of the worst stock-market slides in years -- is effective immediately and will last 10 days, but could be extended for up to 30 days.
In short selling, traders borrow shares of stock and sell them, hoping the price of the shares declines and they can profit by buying them back at a lower price.
The SEC said it was acting in concert with the U.K.'s Financial Services Authority. The FSA said Thursday it would ban short selling in financial stocks until January, and would review the ban in 30 days.
Regulators in other countries quickly followed suit by tightening their own rules on short selling, including Ireland, Australia and France.
Bank of France governor Christian Noyer said Friday that the country's stock-market watchdog Autorité des Marchés Financiers would move to impose new restrictions on short-selling.
Commercial banks expressed skepticism about the Treasury department plan. They fear it may prompt investors to pull their money out of banks and place it in money-market mutual funds, which often have higher rates of return than commercial bank savings accounts.
The Independent Community Bankers of America in a statement said it was extremely concerned about the Treasury's announced mutual-fund guaranty program. "ICBA cautions
Treasury not to propose any solution to Wall Street's turmoil that will drain funding from community banks, constraining their ability to fund local economic activity and growth and serve local communities across the nation."
—Jon Hilsenrath, Kara Scannell, Peter McKay, Joellen Perry, Elizabeth Rappaport, James R. Hagerty, Corey Boles and Cassell Bryan-Low contributed to this article.
Write to Deborah Solomon at deborah.solomon@wsj.com, Michael R. Crittenden at michael.crittenden@dowjones.com and Damian Paletta at damian.paletta@wsj.com
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