- The Washington Times - Saturday, September 20, 2008

Markets staged a global rally Friday as the White House and Congress moved closer to a legislative remedy that would remove hundreds of billions of dollars in troubled assets from the ailing U.S. financial system.

The Dow Jones Industrial Average added 368 points to Thursday’s 410-point rally for a two-day gain of nearly 780 points. By the end of one of the most tumultuous weeks in Wall Street history, the Dow had lost only 34 points.

President Bush asked Congress Friday to approve extensive federal intervention in financial markets that he said is essential to halt the worst financial crisis in decades. “We must act now to protect our nation’s economic health … from serious risk,” Mr. Bush said.

Treasury Secretary Henry M. Paulson Jr., meanwhile, began to sketch an outline of the emerging plan that he estimated would cost U.S. taxpayers “hundreds of billions” of dollars, but offered no details.

“It´s probably $500 [billion] to a trillion dollars, and that´s going to visit the taxpayers sooner or later,” said Sen. Richard C. Shelby, Alabama Republican and ranking member of the Senate Banking, Housing and Urban Affairs Committee. “It´s either going to be a debt charged to all of us or to all our children.”

Mr. Paulson’s 10 a.m. news conference followed a series of extraordinary actions by federal regulators to calm markets and inject liquidity into the nation’s financial system:

cThe Treasury announced a $50 billion plan to insure money market mutual funds by tapping the Depression-era Exchange Stabilization Fund.

cThe Federal Reserve said it would lend up to $230 billion to the money market mutual fund industry through commercial banks. Money market funds, whose coffers are filled with asset-backed commercial paper, will now be able to pledge those illiquid assets as collateral. Investors have been pulling out of money market funds in recent days and putting their money in safer Treasury bills.

cThe Securities and Exchange Commission issued an order temporarily barring the short selling of financial stocks. In a short sale, investors profit by betting that a stock will decline.

Shortly after his news conference, Mr. Paulson and Federal Reserve Chairman Ben S. Bernanke joined Mr. Bush at the White House.

“America’s economy is facing unprecedented challenges, and we are responding with unprecedented action,” Mr. Bush said. “The risk of not acting would be far higher.”

Mr. Paulson insisted that “this bold approach will cost American families far less than the alternative - a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion.”

Treasury’s plan, details of which will be worked out over the weekend during negotiations with congressional leaders, would empower the federal government to “implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy,” the Treasury secretary said.

In addition to removing troubled assets from the financial system, Mr. Paulson said Fannie Mae and Freddie Mac would increase their purchases of less-troubled mortgage-backed securities. Also, the Treasury would expand its own program to purchase mortgage-backed securities. Both actions would make mortgages more available and affordable in the short term, he said.

While the markets were open, the administration held off holding detailed conversations with congressional committees, fearing leaks of market-sensitive information. Intense negotiations were expected to take place throughout the weekend with the goal that a final package be assembled by Sunday night, before overseas markets open.

Sources said negotiators will determine this weekend whether to create a new vehicle to dispose of the troubled assets acquired by government agencies from investment banks and other companies. A similar vehicle, the Resolution Trust Corp. (RTC), was created in 1989 to manage the assets of failed savings and loans.

Negotiators will also decide whether the government will purchase securities besides those backed by mortgages, and whether it will buy mortgage-backed securities at market rates.

The government’s plan “has the potential to lose $400 [billion] to $500 billion, depending upon how much the government pays for the mortgage securities and how much the government collects from the mortgages,” said Peter Morici, a business professor at the University of Maryland.

Mr. Paulson said these risky subprime loans “are now parked, or frozen, on the balance sheets of banks and other financial institutions, preventing them from financing productive loans.”

Nothing the administration or the Federal Reserve has done in the past year has come close to solving the looming problem of subprime mortgage debt. Now, in devising a plan to use taxpayer funds to purchase these illiquid, mortgage-backed securities, the U.S. government is poised to venture down a much more perilous path.

“Certainly, in terms of raw government intervention, this must be the biggest action since the Great Depression,” said Daniel Mitchell, a senior fellow at Washington’s libertarian Cato Institute.

“What the administration is doing is a very worrisome and risky step by repeating the mistakes made by Japan,” he said. “We are going down the path of the interventionist, big government, European welfare state, which will produce slow growth and high unemployment. This bailout will reward people who made mistakes and send a terrible signal throughout the economy.”

The mortgage-related credit crisis has continued to resurface in unexpected places for more than a year but reached critical mass this month when the federal government took over Fannie Mae and Freddie Mac, which own or guarantee $5.4 trillion in mortgages. On Sunday, storied investment bank Lehman Brothers declared bankruptcy, and on Tuesday the government effectively took over American International Group when the Fed loaned the teetering insurance giant $85 billion and replaced its senior management.

Senate banking committee Chairman Christopher J. Dodd, Connecticut Democrat, who was among congressional leaders attending Thursday night’s emergency meeting with Mr. Paulson and Mr. Bernanke, said Friday that the United States could be “days away from a complete meltdown of our financial system.”

At a press briefing following that meeting, House Speaker Nancy Pelosi said: “We hope to move very quickly. Time is of the essence.”

House Financial Services Committee Chairman Barney Frank, Massachusetts Democrat, said legislation could be drafted by his committee as early as Wednesday.

Mr. Frank said Friday he would push for a provision requiring companies that participate in a rescue plan to limit their executives’ compensation.

“We will again be talking about compensation packages,” Mr. Frank said in a speech before AARP, which lobbies for retirees. “If you want to participate in this, we want you to show us that you’ve got rules that don’t allow the excessive golden parachutes.”

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