After a week of dramas, horse-trading and hard negotiations, it looks as if Congress is at last on the brink of agreeing President Bush’s rescue plan. Stephen Foley and Rupert Cornwell report
Sunday, 28 September 2008
There has been too much false optimism and too many sudden turnabouts for anyone to feel confident promising it, but Congress appeared last night to be closing in on a compromise deal to bail out the country’s crumbling financial system.
At the end of a week of high political drama, when John McCain temporarily “suspended” his presidential campaign to focus on the issue, and amid more turmoil on the markets, including the biggest banking failure in US history, lawmakers signalled they were on course for a deal that they hoped to announce before the end of today.
As part of this delicate dance, George Bush made another attempt to sell the $700bn (£380bn) plan to a sceptical public, for whom funnelling so much taxpayer money to Wall Street has stuck in the craw – particularly since these super-remunerated financiers are the architects of their own misfortune and of the disaster potentially facing the economy.
“If it were possible to let every irresponsible firm on Wall Street fail without affecting your family, I would do it,” the President said in his weekly radio address to the public. “The rescue effort we are pursuing is not aimed at Wall Street, it is aimed at your street.”
Mr Bush also insisted that the ultimate cost of the bailout would be far from the $700bn headline figure, even if the government ended up spending every dollar of that buying mortgage assets from troubled banks. Amid the current market panic, those assets were going cheap, he said, and there was every chance the American taxpayer would make back “much, if not all” of the money when the housing market stabilised.
Despite the explosive rejection of an initial compromise by conservative Republicans in the House of Representatives on Thursday, the main proposals of the deal being hammered out by exhausted politicians and staffers over the weekend appeared little changed from those earlier in the week. Hank Paulson, the Treasury Secretary, appeared to have protected its core principle, namely that the US government must step in to buy the toxic mortgage assets that have been sitting on banks’ balance sheets for more than a year, limiting their scope to provide credit to an economy that runs on it and ultimately eroding confidence throughout the entire global financial system.
As a quid pro quo, banks that avail themselves of taxpayers’ money will have to submit to restrictions on executive pay and may have to offer the government equity in the company, so that taxpayers see some upside when the financial system revives. The Treasury has also conceded that the $700bn could be released to it in increments, if and when it is needed, with a bipartisan board overseeing the whole endeavour.
The 100-plus pages of the draft legislation being worked through on Capitol Hill last night is a far cry from the three pages delivered by Mr Paulson last weekend, which sparked fury because of the sweeping powers it would grant an administration that is one of the least trusted in history.
Despite Mr Paulson’s bruising session before the Senate Banking Committee on Tuesday, there was still every sign of a quick deal. Both sides had been galvanised into action by warnings, the previous Thursday, from both Mr Paulson and the normally unflappable Federal Reserve chairman Ben Bernanke that the financial system was on the edge of a precipice and there could be multiple bank failures within days if action was not taken.
Negotiations were intense and good spirited, offering hope of a solid bipartisan agreement until, shortly before 3pm on Wednesday, Mr McCain produced his coup de théâtre: he was suspending his campaign and returning to Washington, and would pull out of Friday night’s debate with Barack Obama, if no deal was reached. At that moment, efforts to end the greatest financial crisis in generations succumbed to bare-knuckle presidential politics.
Mr McCain’s move was plainly an attempt to regain the initiative in a crisis that had catapulted Mr Obama back into the lead – a Washington Post/ABC poll that morning showed the Democrat with a nine-point lead, his largest of the campaign. Now, if the McCain camp was to be believed, their man – who not long ago admitted that economics was not his strong suit – was the key to a deal.
Instead, everything fell apart. As Democrats tell it, Republicans in the House of Representatives cynically turned against a deal they were backing only 12 hours earlier. The White House talks became a virtual slanging match after John Boehner, the House minority leader, declared the package was unacceptable and came up with counterproposals of his own. President Bush was dismayed: “If money isn’t loosened up, this sucker could go down,” he warned the meeting. But this desperately unpopular President, with under four months left in office, is now so weak he could not control his own party, on his own turf.
Chris Dodd, the Democratic chairman of the Senate Banking Committee, was visibly furious, telling reporters that the new Republican stance was “not a rescue plan for our financial system, but a rescue plan for John McCain”. In fact, the rebels had reasons stretching beyond the salvation of their White House nominee. They had reservations all along, these Republicans claimed – and indeed, many are conservatives who object to the bailout on ideological grounds, as tantamount to socialism.
The most important factor, however, was public opinion. Out on Main Street America, in blue states as well as red, the $700bn bailout is even less popular than the President. Not only Mr McCain, but all 435 members of the House are up for re-election. “They simply have to take account of public opinion,” a Republican strategist said. And that applies to Democrats as well as Republicans. For that reason, Democrats will not pass the measure on their own, even though they have the majorities to do so.
The dissidents are playing a gigantic game of chicken with the markets. If bank credit clogs up and Wall Street crashes, public opinion could rapidly turn against them.
So far, the financial markets have remained remarkably patient. For a while share prices rose and fell with the prospects of the bailout’s passage, but eventually traders gave up trying to predict and decided to wait. Wall Street is ready to take its punishment from Congress – it will not squeal at the limits on executive pay, for example – but there is real fear these elements might be structured in a way that undermines the thrust of the bailout.
The devil really is in the detail. The aim of the legislation is to establish clarity about what the nation’s banks are worth so that confidence can be restored, capital can flow back to Wall Street, lending can cascade once more through the branches of those vast, obscure credit markets, and the risk of a freeze in the real economy will be eased. The market will give legislators a verdict, probably within hours of a compromise bill being published.
Mr McCain’s decision to inject himself directly into the crisis has been the riskiest gamble of all. A majority opposed his threat to miss the Mississippi debate, according to polls. Less than 48 hours later he made a U-turn and announced he would take part in the debate after all, even though deadlock remained in Washington. And for all the fanfare surrounding his arrival in the capital, his personal input into the rescue discussions is obscure.
At the White House meeting he said barely a word (while Mr Obama reportedly peppered Mr Paulson with questions). For Democrats, the whole manoeuvre was a stunt, an impulsive, ill-thought piece of grandstanding. If an effective deal is struck today, the whole episode may be forgotten. If the crisis drags on, however, Mr McCain’s behaviour will be seen by critics as further evidence he is an erratic politician, too rash and impetuous to be president. Mr Obama has been cool verging on bland. But at least he has come across as a safe pair of hands.
Q & A: How does the US Treasury aim to save Wall Street?
But what is it all about?
President Bush says the credit crunch means the US and other economies face a “long and painful recession” unless something is done immediately. Under the rescue plan, which must be passed by Congress, the government would buy troubled assets from Wall Street banks so that credit could start flowing again. But it would hand the US Treasury what Democrats and Republicans fear is a blank cheque.
Why is there a problem?
Banks and other financial institutions still hold too many “toxic assets” based on sub-prime mortgages (loans to people with poor credit ratings). The financial crisis has already seen a $200bn (£110bn) government bailout of the US mortgage lenders Fannie Mae and Freddie Mac, an $85bn loan to the US insurance giant AIG and a guaranteed $29bn to support the bailout of the investment bank Bear Stearns.
What’s in the bailout plan?
* Troubled Assets Relief Programme (Tarp) to purchase assets including mortgage-backed securities.
* $700bn to be authorised in instalments of $250bn, which could rise to $350bn on notification to Congress by the President.
* Government to get warrants for equity in participating companies as a way of protecting taxpayers and allowing them to benefit from any profit gains from companies participating in the programme.
* Foreclosure mitigation for homeowners facing economic distress.
* Restrictions on chief executive compensation at companies that participate.
* Financial Stability Oversight Board comprising the chairmen of the Federal Reserve, Securities and Exchange Commission and Federal Deposit Insurance Corp, and two members appointed by Congress to oversee the programme.
* A government investigation into the causes of the current financial crisis. Report to be delivered to Congress by June 2009.
* A Congressional oversight panel that would also submit a report on regulatory reform no later than 20 January 2009, when a new president takes office.
* 20 per cent of any future profits from the bailout fund to go to the Affordable Housing Fund and the Capital Magnet Fund to meet America’s housing needs.
* Federal financial regulatory agencies to co-operate with law enforcement authorities to investigate cases of fraud or misrepresentation with respect to financial products.
And how much will it cost?
No one knows, and that’s a serious problem. Mr Paulson has asked Congress for $700bn (5 per cent of the US GDP), but it could be more – or less. The price of assets will be determined “by market mechanisms where possible, such as reverse auctions” but no real market exists for many of these complex financial instruments, so finding a true value will be challenging. If the government prices them too low, some banks will significantly revalue their assets, exacerbating the credit crunch and making the situation worse. Too high, and it will hand a windfall profit to Wall Street firms that speculated on a bailout – leaving the government open to accusations that it is taking money from taxpayers to bail out rich banks that caused the problem.
How would the US pay for it?
It would borrow money from world financial markets and use up to $700bn of taxpayers’ money. The Treasury has asked Congress to raise the national debt limit to $11.315 trillion – that’s $11,315,000,000,000.
By Stephen Foley in New York
Sunday, 28 September 2008
“After reading this proposal, I can only conclude that it is not only our economy that is at risk, Mr Secretary, but our constitution as well.” So said the chairman of the Senate’s banking committee, Christopher Dodd, as Hank Paulson, the Treasury Secretary, squirmed under questioning. That hearing, on Tuesday, was when Mr Paulson realised he had made a terrible miscalculation.
Just a week ago, this multimillionaire former banker appeared to be single-handedly holding up the world’s financial system when he presented Congress with a simple, three-page bailout plan that would have handed him unprecedented personal power, free from judicial or congressional oversight, to spend $700bn (£380bn) of taxpayer money buying and selling Wall Street’s disastrous mortgage investments. By the end of the week, he was on his knees, begging Nancy Pelosi, the Democrat Speaker of the House, to keep his proposal alive. The image of the brick-built Treasury Secretary literally on one knee in the White House Roosevelt Room succinctly captures Mr Paulson’s humiliation.
Despite a personal fortune estimated at $500m a couple of years back, Mr Paulson has cut an engaging, self-effacing figure. A lifelong environmentalist, who raises raccoons, alligators and turtles on the family farm back in Illinois, he looked an ill-fitting choice for the Bush administration as Treasury Secretary. He initially resisted going to Washington, knowing full well that its modus operandi is different from the world of investment banks that he knew at Goldman Sachs. Here, a chief executive’s word is law, and even a three-page document would be regarded as too much red tape.
To the conservative right, he has betrayed the free-market, anti-government orthodoxies. To the American public, he is the architect of a plan to bail out his fat-cat friends on Wall Street. And to the bigwigs of finance, he has been just about the worst possible advocate of a plan that could be the only hope of avoiding a prolonged recession. Business commentators raged that he was unable to translate Wall Street gibberish into plain English, watching him try to explain to Congressmen how the government might used reverse auctions to value collateralised debt obligations, instead of saying: this plan is about saving jobs, allowing Americans to buy homes and saving small businesses.
Mr Paulson has not improved as a public speaker in his two and a half years at the Treasury. Even at Goldman Sachs he used to say, “I am not an inspirational leader, I’m just not.” Never has that been more true – and more disappointing and dangerous – than in these past seven days.