WASHINGTON - The Bush administration insisted Sunday that Congress must move quickly to approve what one lawmaker called the "mother of all bailouts" — a $700 billion proposal to buy a mountain of bad mortgage debt in an effort to unfreeze the nation's credit markets.
Congressional leaders endorsed the plan's main thrust, saying passage might occur in a matter of days. But they said it must be expanded to include help for people on Main Street as well as the big Wall Street financial firms who have lost billions of dollars through their bad investment decisions.
The proposal "does not include the necessary safeguards," said House Speaker Nancy Pelosi, D-Calif. She called for "independent oversight, protections for homeowners and constraints on excessive executive compensation."
Treasury Secretary Henry Paulson stressed that time was critical to get the proposal passed and that changes to the administration's measure, which was sent to lawmakers on Saturday, could delay that approval, further unsettling global financial markets, which have already seen a number of stomach-churning days as the result of the biggest upheaval on Wall Street since the Great Depression.
The administration, which has been scrambling to deal with all the tumult, announced late Sunday that it was modifying a program announced just two days ago to try to bolster the teetering $3 trillion money-market mutual fund industry.
On Friday, the government said it would use a $50 billion Treasury fund to provide government guarantees for money-market mutual fund accounts. However, in a significant revision announced late Sunday, the Treasury Department said it would only guarantee funds that were in the accounts as of last Friday, indicating that money deposited after that date would not be guaranteed.
The guarantees had been put in place to stem a wave of withdrawals from mutual fund accounts that had been sparked largely by panicked institutional investors.
But the banking industry had complained that the new guarantees ran the risk of sparking withdrawals by their savings depositors who might decide to transfer their bank deposits, which are government-insured, to money-market mutual funds, which often pay more in interest than bank savings accounts but up until Friday had not enjoyed any government guarantees.
The American Bankers Association praised Treasury's about-face. "By limiting this new guarantee to funds that existed on or before last Friday, they have eliminated the incentive for people to move money out of bank accounts to seek a higher government guarantee," ABA President Edward Yingling said in a statement.
In another change, Treasury said that funds deposited in tax-exempt money-market mutual funds as of last Friday would also be covered. Originally, the department had said those funds would not be covered because it might jeopardize their tax-exempt status.
In the past two weeks, the government has taken over the country's two biggest mortgage companies, Fannie Mae and Freddie Mac, and its biggest insurance company, American International Group Inc., and stood by while the nation's fourth-largest investment bank, Lehman Brothers, was forced to declare bankruptcy and another investment giant, Merrill Lynch, was forced to sell itself to Bank of America.
Paulson and Federal Reserve Chairman Ben Bernanke made the joint decision last week that the only way to stop the carnage was to deal with the root cause of all the troubles, billions of dollars of bad mortgage debt sitting on the books of major financial companies. This debt has triggered the worst credit crisis in decades, causing credit markets to essentially freeze up last week despite the fact that the Fed joined with major central banks around the world to pump billions of dollars of reserves into the financial system.
The plan the administration has developed with support from the Fed would have the government buy up to $700 billion of the bad loans, taking them off the books of financial firms with the hope that this will allow those companies to resume normal lending operations. Sen. Richard Shelby of Alabama, the top Republican on the Senate Banking Committee, said the government's efforts would be the "mother of all bailouts" that could well cost $1 trillion when the cost of the government takeovers of Fannie, Freddie and AIG were included.
Paulson, appearing on four of the five Sunday morning talk shows to sell the plan, insisted that the administration had no choice.
The cost of doing nothing would have been far more severe because the clogged credit markets would make it harder for businesses to get the loans they need to keep operating, he said. Doing nothing also would make it harder for consumers to get the credit they need for car loans and other purchases, the Treasury secretary said. Consumer spending accounts for two-thirds of total economic activity.
"We need to look at what is going on in the credit markets and they are still very fragile right now and frozen," Paulson said on NBC's "Meet the Press."
In addition to what is happening in the United States, Paulson said he was confident that other major countries would take similar actions to support their financial systems, helping to avert a global meltdown.
"We have a global financial system and we are talking very aggressively with other countries around the world and encouraging them to do similar things and I believe a number of them will," Paulson said on ABC's "This Week." He refused to name the countries that he expected would act.
Congressional Democrats said they understood the need for urgency but insisted that the measure needed to provide help for homeowners threatened with losing their homes. And some GOP leaders told the White House on Sunday to prepare to accept more oversight and guarantees that the Treasury will recoup some of the bailout money.
Republicans, however, appeared less eager to support several other Democratic proposals. One would change bankruptcy laws to allow for mortgages to be modified, something financial companies have strongly opposed. Another would cap benefit packages for executives at the huge Wall Street firms that will be selling their bad debt to the government.
"It would be a grave mistake to say that we're going to buy up a bad debt that resulted from bad decisions of these people and then allow them to get millions of dollars on the way out," said House Financial Services Chairman Barney Frank, D-Mass. "The American people don't want that to happen and it shouldn't happen."
Senate Banking Committee Chairman Christopher Dodd, D-Conn., told reporters at a Capitol Hill news conference on Sunday that while he hoped Congress could pass the legislation this week "if it takes a little longer, then so be it."
He said financial markets should be reassured that Congress was moving toward a significant response and a few more days to "get it right" should not trigger a renewed nosedive on Wall Street.
The whole congressional debate is occurring just weeks before voters go to the polls. Both Democratic presidential candidate Barack Obama and Republican John McCain have given grudging support to the bailout effort. Obama has also called on Congress to pass a second economic stimulus bill given the economy's weak state, with unemployment at a five-year high of 6.1 percent.
While Paulson gave no indication during the interview shows of what changes the administration would be willing to accept, the administration did modify an early draft obtained by The Associated Press in a significant way.
A later version expands the definition of the financial firms that would qualify to sell their bad debt to the government to include not just U.S. firms but also foreign firms doing business in the United States if the government decides debt purchases from those firms are needed to stabilize the financial system.
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 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 with him.
Republicans warned against too many amendments. "This would be the most serious financial crisis that the world has ever dealt with. It is not a time to be playing games," said House Republican Leader John Boehner.
Paulson said in his round of interviews that the nation's outdated regulatory system for financial markets must be overhauled but the first job is to get the rescue package through Congress and then deal with a comprehensive regulatory overhaul next year.
The administration's proposal seeks an increase in the limit on the national debt from $10.6 trillion to $11.3 trillion to make room for the massive rescue. But Paulson said that the government would recoup a part of the $700 billion when the housing market recovers and the mortgage assets rebound in value.