Dire Bernanke Speech Shocked Congress

Congressional and administration leaders split today over how a bailout package for U.S. financial markets should look, even as all sides called for swift action.

Wrangling over the size and shape of the relief package belied a universal sense of urgency about getting it through Congress after a week of turbulence on Wall Street and concerns about global implications of a possible U.S. economic meltdown.

Treasury Secretary Henry Paulson told ABC News' "This Week with George Stephanopoulos" that the government was preparing to extend bailout protection to foreign companies caught up in the nation's financial crisis, but Paulson rejected proposals that the bailout include new caps on executive compensation or steps to protect American homeowners, who are facing foreclosure in unprecedented numbers.

"We need a lot of reforms. And this is going to be something Congress and the next administration is going to be working on for a long time," Paulson told Stephanopolous. "But these can't be done, and shouldn't be done, in a matter of days. And we need this program in days in order to protect the American people.

"We've been focused on homeowners for a long time, working to avoid foreclosure," he said. "It sure seems to me that, as we buy these mortgage-backed assets, we will have much more leverage in working on the kinds of programs we need to work on."

Senate Banking Committee chairman Sen. Chris Dodd, however, in a separate appearance on "This Week," said the foreclosure crisis needed to be addressed.

"The fact of the matter is the cause ... it isn't just an effect ... the cause of this problem is still the foreclosure crisis," Dodd said. "So it needs to be part of the solution. That's not to clog this up. We need to act quickly and deliberately, and we will."

Dodd went as far as to call the bailout more important than the presidential race.

"We're 40 days away from a national election, but this issue supersedes an election," Dodd told Stephanopolous. "We need to get this right."

Dodd described a sense of shock among congressman when Federal Reserve chairman Ben Bernanke laid out for them the dimensions of the economic crisis.

"When the chairman of the Federal Reserve described the situation to us, there was a pause for about 10 or 15 seconds when nothing was said," Dodd told Stephanopolous. "The air came out of the room. It was that ... startling."

House Minority Leader John Boehner, R-Ohio, who appeared alongside Dodd on "This Week," echoed the senator's alarm.

"This is not a time for ideological purity," said Boehner. "I'm a free-market non-interventionist, but we face a crisis. And if we don't act, if we don't act quickly, we're gonna jeopardize our economy."

Sen. Charles Schumer, D-N.Y., said that he believed there would be changes to Paulson's plan and that agreement could still be reached quickly.

Schumer said that he was pushing to get a provision where the government would receive stock warrants in return for the bailout relief and for the creation of a government oversight board to supervise the huge operation, which under Paulson's plan would be run out of the Treasury Department. He said Paulson seemed receptive to changes when he had discussed his ideas.

"I have told him ... we need changes related to housing, we need to put the taxpayer first ahead of bondholders, shareholders," Schumer said on "Fox News Sunday."

Members of Congress worked through the weekend to hammer out the plan's specifics, in part because the legislature is set to recess this Friday and won't return until after the presidential election on Nov. 4.

A Plan Takes Shape

Key administration players took to the airwaves Sunday to make the case for a proposed $700 billion financial industry bailout after the collapse last week of investment bank Lehman Brothers, the sale of Merrill Lynch to Bank of America and previous bailout packages for Bear Stearns and insurance giants Freddie Mae and Fannie Mac.

Paulson told Stephanopolous that the White House will push for foreign firms to be included in the plan.

"We have a global financial system. And we are talking very aggressively with other countries around the world," Paulson said.

"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," he said. "That's a distinction without a difference to the American people. The key here is about protecting the system."

President Bush said Saturday the White House is ready to work with Congress to quickly enact legislation to allow the government to purchase hundreds of billions of dollars worth of bad debt linked to the collapse of the housing market.

The administration proposal would be the biggest government intervention since the Great Depression. It would dole out huge sums of money to financial firms to purchase their holdings of bad mortgage-backed securities so that these firms can resume normal lending operations. The bad mortgage debt has been at the heart of the current credit crisis, which hit more than a year ago but erupted with special ferocity in the past two weeks, forcing extraordinary government actions.

Two weeks ago, the government seized control of the nation's two largest mortgage companies, Fannie Mae and Freddie Mac, and then last week, it took control of the country's largest insurance company, American International Group Inc.

The new proposal would raise the statutory limit on the national debt from $10.6 trillion to $11.3 trillion to make room for the massive rescue.

"I don't think anyone knows whether it will work or not. I think in the short run it has the potential to increase confidence," financial analyst David Vise told ABC News' "Good Morning America Weekend Edition" today. "The plan is basically to prop up the United States system."

But finding a solution to the credit crisis that has now dominated the financial markets won't happen without some pain, according to Vise.

"There is no panacea, There is not painless solution here," said Vise, who added the economy's primary problem is a lack of confidence.

"The idea is to inspire confidence," Vise said.

What It All Means

The plan's $700 billion price tag is a large one for taxpayers. It's the amount the government would increase on the budget's limit under the Treasury Secretary's supervision so that it could buy up big bundles of toxic assets, like bad mortgages, which are weighing down Wall Street.

The idea is that with cleared balance sheets, banks could go back to work and again lend money to individuals for new homes, cars, businesses and college tuitions.

The government doesn't want to own the bad mortgages for long. The plan is to resell them eventually and recoup the money. The Treasury's new powers would last for only two years and the secretary would have to report to Congress semi-annually.

"The government becomes essentially, one of the largest, or the largest homeowner in the country," said Stanford Group Company analyst Anne Mathias. "When you joke about your mortgage and you say, 'Well, I don't own my house, the bank owns my house.' Well, now, you don't own your house but the government owns your house."

But the bailout could have an economic downside — inflation.

"[There is] no question at all is that this could increase inflation," Vise said.

He said officials believe a rise in inflation is less of a problem than troubles currently causing the economy's hemorrhaging.

Democrats have said they will work with the administration to pass a plan, but will demand it include relief for homeowners struggling with mounting debt and not just Wall Street.

It's the Economy Again, Stupid

The country's financial troubles have become a major focus in the presidential election.

"It looks like it's a defining moment in the race," Stephanopoulos said on "GMA" today. "This crisis over the last week has really brought focus to the economy."

Already, Republican nominee John McCain and rival Barack Obama have come out swinging on the issue.

Obama has hammered McCain for what he believes is a flip-flop -- using the Arizona senator's own words against him. He referred to a magazine article McCain once wrote where he suggested the country should cut regulation of health insurance "as we have done over the last decade in banking."

"He wants to run health care like they've been running Wall Street," Obama told a crowd of more than 15,000 in Jacksonville, Fla. "Well, senator, I know some folks on Main Street who aren't going to think that's a good idea."

The McCain campaign has called that assertion a distortion and claims its six-point plan supporting new regulations shows leadership.

Obama canceled unveiling a plan of his own, as his aides said a measured approach is more presidential.

America's financial troubles have taken the focus off the personalities of the campaigns and back toward the issues, Stephanopoulos said. He added that it's had a benefit for Obama, who spent the last several weeks trying to combat the Sarah Palin effect, which boosted McCain's campaign and its support.

But one thing is inescapable. Whoever wins the presidency will inherit an office facing a deep recession and spend the first year digging out of an economic hole rather than furthering his own agenda, Stephanopoulos said.

When asked what will happen if the emergency bailout fails, Paulson asserted, "This is something that has to work. I very much believe it will work."

In a separate appearance on "Meet the Press," Paulson admitted the bailout would be costly for taxpayers, but said that the government was picking the better of two bad choices.

"It pains me tremendously to have the American taxpayer put in this position," Paulson said, "but it is better than the alternative."

The Associated Press contributed to this report.