Federal Reserve Chairman Ben S. Bernanke Tuesday warned of dire consequences for the economy and for average Americans if lawmakers do not quickly pass a $700 billion bailout for faltering banks.
But lawmakers remained deeply skeptical about the bill and warned that it will take longer than a week to pass and will include provisions that the administration opposes. Leading Democrats remained bent on including limits on bank executive compensation and an equity stake for taxpayers in the banks that benefit from the bailout.
The administration’s blueprint, which would give the Treasury sweeping authority to buy an assortment of toxic debt from banks with few strings attached, is “not acceptable,” Chairman Christopher J. Dodd told top Bush officials testifying before the Senate Banking, Housing and Urban Affairs Committee.
“A lot of reservations have been expressed this morning by Democrats and Republicans,” the Connecticut Democrat said after the five-hour hearing. “This is not going to work.”
President Bush, who attended a plenary session of the U.N. General Assembly yesterday, said other world leaders have asked him whether Democratic objections would derail the plan in Congress.
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“I’ve assured them that the plan laid out by Secretary Paulson is a robust plan to deal with a serious problem,” he said. “I’m confident that there will be a bipartisan bill … a rescue plan to make sure that there’s some stability in the markets.”
Markets were more subdued Tuesday as the tense hearing kept many traders on Wall Street riveted to TV screens. Stocks experienced moderate losses while signs of life appeared in the stricken credit markets. New funds trickled into money-market accounts that were battered by massive withdrawals last week.
Markets may be lifted Wednesday by news overnight that Warren Buffett’s Berkshire Hathaway is buying a $5 billion stake in Goldman Sachs, a leading Wall Street firm that converted itself into a bank last weekend.
House leaders said after a meeting of the Democratic caucus that the Treasury plan would be a hard sell without major changes. A spokesman for House Speaker Nancy Pelosi, California Democrat, said the administration will have to coax balking Republicans to vote for the plan.
“We don’t expect every Democrat to vote for it. Maybe our caucus will be split,” said Pelosi spokesman Nadeam Elshami. “But it’s the Republicans who are having problems.”
The White House began an effort to round up votes Tuesday with Vice President Dick Cheney, White House Chief of Staff Joshua B. Bolten and economic policy adviser Keith Hennessey meeting with Republicans in both chambers.
House Republican leaders raised serious concerns during the closed-door meeting with Mr. Cheney, challenging the necessity of the plan, its prospects for success and its size, as well as whether alternatives had been considered, an aide familiar with the meeting said.
House Minority Leader John A. Boehner, Ohio Republican, told those attending the meeting that the severity of the financial crisis warrants government intervention, but he said he won’t vote for a hastily written, “bad” Democratic bill.
Many legislators expressed doubt that the plan would resolve the long-running credit crisis and feared that a failure would leave the United States broke and without further options to deal with a sinking economy.
“I am frightful to the point of almost panic that I do not see a solution in your plan,” Sen. Jim Bunning, Kentucky Republican, told Treasury Secretary Henry M. Paulson Jr.
He noted that Mr. Paulson will not be in office after Jan. 20, when the next president is sworn in, and will not be accountable for any failure.
Mr. Paulson was flummoxed after senators expressed outrage that he quietly expanded the bailout program last weekend, citing a Washington Times article on his plans to purchase student loans, credit cards, auto loans and other “troubled” bank assets besides mortgages. Mr. Paulson defended his assumption of broad powers to address the crisis.
The Treasury and Fed chiefs expressed confidence that the plan will calm stricken markets and made impassioned pleas for quick action. They stood their ground in particular against Democratic demands for equity and compensation caps, which they said would make the bailout unworkable and lead to failure.
Mr. Bernanke directly confronted the biggest problem perceived in the plan drafted by Mr. Paulson, who was chairman of Goldman Sachs before joining the Treasury: It appears to bail out Wall Street while doing nothing for Main Street businesses and consumers.
“I’m a college professor. … I never worked on Wall Street. I don’t have those interests, those connections,” Mr. Bernanke said. “My interest is solely for the strength and the recovery of the U.S. economy.”
“If this is not done, there will be significant adverse consequences for average people in the United States,” he said, including recession, rising joblessness, loss of credit and accelerating foreclosures.
Mr. Bernanke pointed out that he is one of the nation’s foremost experts on the financial crisis that swept the country into the Great Depression in the 1930s.
Suggesting that such a situation could recur, Mr. Bernanke said he has concluded that if the credit crisis on Wall Street continues, “the economy will just not be able to recover.”
Committee members told Mr. Paulson that their constituents are overwhelmingly against the plan.
Several protesters found their way into the committee room. One carried a placard saying, “No Blank Check,” and another shouted, “Just remember, the fox is guarding the henhouse.”
“I share the outrage out there,” Mr. Paulson said. “It’s embarrassing. There’s a lot of blame to go around.”
He pointed to the Wall Street firms that devised the “overly complex” derivative securities that turned into toxic debt, rating agencies that gave the securities AAA ratings, and lenders and borrowers who stretched rules and lied to get loans.
Mr. Paulson said he has agreed to Democrats’ changes in the Treasury plan requiring the government to help prevent defaulting homeowners from losing their homes to foreclosure and establishing stringent congressional oversight of the bailout program.
He also expressed sympathy for other Democratic demands.
“I’ve heard your comments on executive compensation. I share your frustrations. I feel those frustrations. Practices throughout America also upset me.”
But the Treasury chief said the heavy penalties, sought by Democrats, against executives and banks will discourage them from participating in the bailout program and will cause it to fail. The goal of the program is to create a market for the toxic securities, which currently are unsellable and clogging up the balance sheets of banks and Wall Street firms, making it harder for them to make new loans.
“The taxpayer is already on the hook and is going to suffer the consequences if things don’t work the way they should,” Mr. Paulson said. “So the best protection for the taxpayer is to have this work.”
Sen. Charles E. Schumer, New York Democrat, said the plan might be more palatable if Congress provides Treasury with borrowing authority in increments of $50 billion or $150 billion. Mr. Paulson dismissed that idea as unworkable and “a grave mistake.”
“We have to reduce the cost to taxpayers as significantly as possible by looking at passing only a first installment,” Mr. Schumer said.
Meanwhile, the Associated Press reported Tuesday that the FBI had begun investigating four institutions whose collapse helped trigger the financial crisis: mortgage giants Fannie Mae and Freddie Mac, investment bank Lehman Brothers Holdings Inc. and insurer American International Group Inc.
Jon Ward, David Sands, S.A. Miller and Sean Lengell contributed to this report.
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