-- President Bush again pressed for quick action Monday on a $700 billion government bailout plan for Wall Street, but some key Democrats urged a more deliberate approach as negotiations continue.
The uncertainty helped send the Dow Jones industrial average down almost 200 points at mid-day.
Bush issued a statement at the White House saying "the whole world is watching" how the U.S. government addresses the continuing turmoil in the worldwide financial markets, as investors await more details about the government's plan to buy banks' mortgage debt.
Anxious lawmakers have vowed cooperation but insisted that any rescue include more government accountability, aid troubled homeowners and prevent Wall Street executives at taxpayer-aided firms from reaping generous payouts.
Monday, some leading congressional Democrats were calling for a more deliberative approach than that favored by Bush.
Senate Banking Committee Chairman Christopher Dodd voiced confidence in Treasury Secretary Henry Paulson, saying that "we've got the right man" to deal with the problem that has roiled not only Wall Street but international markets as well. But his counterpart in the House, Rep. Barney Frank, accused Paulson of pushing Congress to move too hastily.
Dodd, D-Conn., said Monday morning that there will be a division of thought in Congress about how best to proceed on a $700 billion bill the Bush administration is seeking from lawmakers to buy up bad mortgage loans that have been weighing down financial companies since they became engulfed in a severe credit crisis 14 months ago.
Dodd, interviewed on CBS's The Early Show, said many members of Congress believe a legislative relief package also should be tailored to protect taxpayers in the best way possible. He said they should be "first in line" to get money back once conditions in the industry stabilize and recover.
Under a proposal outlined Monday by Dodd, a draft of which was obtained Monday by the Associated Press:
• Judges could rewrite mortgages to lower bankrupt homeowners' monthly payments.
• Companies that unloaded their bad assets on the government in the massive rescue would have to limit their executives' pay packages and agree to revoke any bonuses awarded based on bogus claims.
• The government would have broad power to buy up virtually any kind of bad asset, including credit card debt and car loans, from any financial institution in the U.S. or abroad in order to stabilize markets.But it would end the program at the end of next year, instead of creating the two-year-long initiative that the Bush administration has sought.
• An emergency board would be established to keep an eye on the program with two congressional appointees, and a special inspector general appointed by the president.
Also Monday, finance officials from the globe's major economic powers said they welcomed the steps taken to stem the crisis. The Group of Seven, made up the the United States, Japan, Germany, France, Britain, Italy and Canada, issued a statement saying it was "ready to take whatever actions may be necessary, individually and collectively, to ensure the stability of the international financial system."
On Sunday, Paulson made the rounds of the major TV news programs to make the case that hisprogram to buy up toxic mortgage securities is vital to keep financial markets functioning and prevent a collapse.
"The credit markets are still very fragile right now and frozen," Paulson told NBC's Meet the Press. "We need to deal with this and deal with it quickly."
Acknowledging that taxpayers and some members of Congress are dubious — and upset — about rescuing wealthy firms that made risky business bets, Paulson said there is simply no other path given worldwide carnage in financial markets.
"It pains me tremendously to have the American taxpayer put in this position, but it is better than the alternative," Paulson said. He and President Bush are urging Congress to pass a plan by the end of this week.
If approved, the government's commitments related to the credit crunch would be about $1.6 trillion. At $700 billion, the latest pledge would approach the more than $750 billion that's been spent for the wars in Iraq and Afghanistan and fighting terrorism since Sept. 11, 2001.
On Capitol Hill, top lawmakers from both parties said they understand the enormous stakes and want to act this week. But House Speaker Nancy Pelosi, D-Calif., said Congress would "not simply hand over a $700 billion blank check to Wall Street and hope for a better outcome," adding that the "party is over for the Bush administration's anything-goes, failed economic policies."
Sen. Richard Shelby, R-Ala., whose support is pivotal as he's the senior Republican on the Banking Committee, said he is "unconvinced that Treasury's proposal strikes a balance between the interests of the taxpayer and the economy."
A list of changes
Frank gave Treasury a list of changes he wants in any bailout bill: limits on executive compensation at firms aided by the government; regular reports by Treasury, including audits by Congress' Government Accountability Office; and more intense federal efforts to help homeowners prevent foreclosure.
The White House plan would give Treasury sweeping power to issue up to $700 billion in bonds to fund the purchase of residential and commercial loans that have gone bad, either in the form of mortgage-backed securities or regular loans.
Treasury officials, who would report periodically on their holdings, could buy other assets if necessary to stabilize financial markets. The program, to be overseen by private asset managers, would run for two years, covering loans made before Sept. 17. To qualify, financial institutions would have to have "significant" U.S. operations, though Treasury and the Federal Reserve could widen the program. Congress would increase the federal debt limit by $700 billion to $11.3 trillion.
Paulson said on ABC's This Week that the White House will push to include foreign firms in the plan. "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. "The key here is about protecting the system."
Dodd said lawmakers want to improve the legislation, not derail it. He said a briefing by Paulson and Fed Chairman Ben Bernanke outlining the potential devastation from a financial-sector meltdown was so grim that he "had to go back almost to the reactions I had to the 9/11" attacks to describe his state of alarm.
The plan follows a series of government efforts over the past year that failed to stabilize credit markets. Spooked investors last week pulled an estimated $200 billion from money market funds, sent stock markets gyrating and forced central banks to pump in hundreds of billions of dollars to keep credit flowing.
In another sign that troubles in financial markets are far from over, the Fed late Sunday announced that it had approved the applications of investment banks Goldman Sachs and Morgan Stanley to become bank holding companies — pending a five-day waiting period. The change gives the firms more power to bolster their financial bottom lines by raising deposits. It will also allow them to borrow directly from the Fed's discount window as commercial banks can.
Paulson's solution is for the government to buy up all of the toxic mortgages and mortgage-backed securities at the heart of the credit crisis. Banks cannot easily sell them because their values are dropping as housing prices fall and mortgage delinquencies rise. They've written down the value of those securities by billions of dollars, which has shrunk their capital and the amount available to lend.
The credit squeeze has already spawned 12 bank failures this year, including one on Friday in West Virginia. It has made financial firms wary of lending to one another for fear they won't get paid back and made them tighten lending standards for businesses and consumers alike.
'Fearful and unconvinced'
House Minority Leader John Boehner, R-Ohio, said Sunday he would work for the plan. But a number of GOP lawmakers were skeptical about the huge price tag and enormous expansion of federal authority, especially after Treasury's recent takeover of mortgage giants Fannie Mae and Freddie Mac and the Fed's emergency $85 billion loan to struggling insurance behemoth American International Group.
"I'm skeptical, fearful and unconvinced," says Rep. Jeb Hensarling, R-Texas, who fears the nation is moving toward European-style socialism. "Having said that, it may be the most important vote I cast in my congressional career, so I continue to keep an open mind about the subject … study it, think about it and pray about it."
Economists said decisive action is needed — and well overdue. "They let the crisis go on for too long. They fiddled around with these liquidity programs" that let investment banks borrow money at low rates, said Brian Bethune, chief U.S. economist of Global Insight. "The bottom line is that it has not been enough."
Yet analysts disagree over whether even $700 billion is sufficient and whether the plan will inflict long-term damage on the economy. Bethune says the funding should be adequate. He estimates the face value of the mortgage-backed securities is $1.25 trillion, of which banks already have written off about $500 billion, leaving about $800 billion.
But he says they will likely write down an additional $100 billion to $200 billion: "I think ($700 billion) seems reasonable in terms of the total number, and it's more than what I expected."
The distressed assets are now selling on average for about 40 cents on the dollar, with even viable securities getting sharp markdowns. The government, he says, will likely pay more than that but less than the securities' actual worth if they were held to maturity — perhaps about 60 cents on the dollar.
Several months may be required to fund the plan and buy the securities, but the announcement itself could calm spooked markets, letting banks attract new investment even before they unload the bad debt. In fact, it could boost the value of the securities, causing some banks not to sell and cutting the bailout's cost, Bethune says. "Some banks may not even bother to sell," he says.
Yet the plan also carries big risks. Christopher Whalen, managing director of Institutional Risk Analytics, says the government ultimately will have to spend as much as $1.4 trillion buying sour mortgage assets, depending on how many foreign banks participate. Its ability to borrow all that money is not a given, he says.
Whalen predicts the bailout will set off economic upheaval. The government will have to borrow so much that it will drive up interest rates, weaken the dollar and worsen inflation.
"I think you can see interest rates in the double digits," he says. "Congress thinks they can borrow forever. The dollar is going to fall. Nobody is going to want to hold U.S. debt."
Whalen says, "I don't think we need to rescue Wall Street. Wall Street is curing itself quite nicely. If we don't allow our people to feel pain, it's not going to inoculate them" against future crises.
Some economists warn that the long-term costs to the USA will loom even larger, as the bailouts hurt future federal spending for health care, Social Security and education.
"They're just blowing the bank wide open right here," says Jagadeesh Gokhale, senior fellow at the Cato Institute. "We still really don't know what the exposure may be."
The financial sector is lobbying for changes and clarifications in the plan. The Financial Services Roundtable, which represents 100 of the largest financial services companies, said Sunday that while it supports the general thrust of the proposal, it wants a mechanism to figure out what kind of assets the Treasury should buy, and at what price.
More generally, banking and financial firms say that a series of bold actions taken by Treasury in recent days could have unintended consequences on financial firms. Just Friday, for example, Treasury said it would temporarily insure the holdings of money market mutual funds up to $50 billion to firms that pay a fee to participate in the government program.
Money market mutual funds hold about $234 billion of asset-backed commercial paper. In recent days, investors have acted to get out of money market mutual funds, forcing firms to sell holdings to pay the investors. But the crisis in financial markets has made it harder for firms to sell even their high-quality holdings.
Independent mortgage consultant Howard Glaser says the bailout puts the government in an awkward, conflicted position. "The federal government is both the owner of the loan and so may want to seek maximum return by foreclosing, and they have an express interest in keeping people in their homes and trying to avoid foreclosures."
But he says, "My broad sense is there are no arrows left in the quiver for the federal government.
"They have to take action. It's not perfect, but it's the only avenue they have at this point."
Contributing: David Jackson, Edward Iwata, Kathy Kiely, Douglas Stanglin, Roger Yu, Associated PRess