Congressional Democrats on Sunday began to put their imprint on the Bush administration’s historic $700 billion bank rescue plan, persuading the Treasury Department to use the new powers it would acquire to keep people from losing their homes.
In the first of what are likely to be a series of concessions to Democrats, Treasury said it would use its leverage when acquiring defaulted loans to work with homeowners to avoid foreclosure, although it cautioned that not everyone can be saved.
Meanwhile, the massive restructuring of Wall Street continued Sunday night as the Federal Reserve announced that it has granted requests from Goldman Sachs and Morgan Stanley — the last remaining major investment houses on Wall Street — to become bank holding companies. The move enables the firms to acquire banks and take deposits that will bolster their resources and stability.
In weekend-long negotiations with the Treasury, Democrats demanded assistance for “Main Street” as well as Wall Street as a condition for getting the bailout bill quickly through Congress this week to ensure financial markets do not head back into a tailspin when they reopen Monday.
The demands from Democrats, which would add to the overall cost of the package but address criticisms that it is weighted too much in favor of banks, were voiced both in counterproposals in behind-the-scenes talks, as well as by the party’s standard-bearer on the campaign trail.
“As of now, the Bush administration has only offered a concept with a staggering price tag, not a plan,” Democratic presidential candidate Barack Obama said as he campaigned in Charlotte, N.C., the home of one of the nation’s biggest ailing banks, Wachovia Corp.
“Even if the U.S. Treasury recovers some or most of its investment over time, this initial outlay of up to $700 billion is sobering,” he said. “In return for their support, the American people must be assured that the deal reflects the basic principles of transparency, fairness and reform.”
Besides demanding that Treasury work with homeowners who have defaulted on their loans with an eye toward helping them reschedule or refinance the loans, Democrats said they want caps on the compensation of bank executives who sell their bad loans to the Treasury, as well as strict oversight of the Treasury program by Congress.
Treasury Secretary Henry M. Paulson Jr. said on “Fox News Sunday” that there is no need for legislative provisions to help homeowners, because Treasury will have the power to provide mortgage relief to homeowners once it acquires the loans from banks under the plan.
He noted that the administration already has programs to help mortgage holders stay in their homes. He said that owning the loans under the new program will give Treasury “leverage” with the companies servicing the loans to ensure that they do everything they can to avoid foreclosure. But he cautioned that many of the homeowners in default cannot be saved.
A source close to the negotiations told The Washington Times said Mr. Paulson is addressing Democratic concerns, although Treasury is reluctant to put the mortgage relief provisions into legislative language.
As a possible model for Treasury, the Federal Deposit Insurance Corp. has instituted a program of helping homeowners who took out loans from IndyMac bank, which the agency shut down in July after it succumbed to bad debts.
Democrats also hit on the need for accountability from Treasury and bank executives, and their concerns were seconded by Republican presidential candidate John McCain.
House Speaker Nancy Pelosi, who led negotiations with the Treasury over the weekend, said Sunday that Treasury’s plan “does not include the necessary safeguards.” The California Democrat also called for “independent oversight, protections for homeowners and constraints on excessive executive compensation.”
Mr. Obama agreed Sunday, saying, “There must be no blank check when American taxpayers are on the hook for this much money.
“Taxpayers shouldn’t be spending a dime to reward CEOs on Wall Street while they’re going out the door,” he said.
In view of the critical role that Mr. Paulson has played throughout the financial crisis in the past year, Mr. Obama told the financial news channel CNBC later in the day that he wouldn’t rule out a transitional role for the Treasury secretary should the Democratic ticket win the presidential election.
Mr. McCain told CNBC that he also was concerned about giving too much power to the Treasury and too much money to chief executives.
“I think we need to appoint an oversight board of the most respected people in America, such as maybe Warren Buffett, who’s an Obama supporter, Mitt Romney, Mike Bloomberg, so that there can be some kind of oversight of, instead of just putting all this responsibility on a person who may be gone in four months,” he said.
“No CEO of any corporation or business that is bailed out by us, that is rescued by American tax dollars, should receive any more than the highest-paid person in the federal government,” he added.
Mr. Paulson appeared willing to negotiate on the broad powers that the legislation would give Treasury over the next two years to take over banks’ debts and operations. But he resisted the demands for caps on bank executive compensation, calling that “punitive.”
Analysts say the Treasury plan would give the secretary unprecedented, almost dictatorial powers over the financial sector, including rights to determine the value of the acquired mortgage assets and to declare a bank to be a “government agent” once its debts are assumed.
Under one provision, Treasury’s decisions on these matters could not even be reviewed by the courts as other government actions are.
“This provides greater powers to the secretary of the Treasury than even the president enjoys,” said Joshua Rosner, managing director at Graham Fisher & Co.
Without clearer directions from Congress or strict oversight, he said, the Treasury plan runs the risk of forcing taxpayers to pay too much for the toxic mortgage debt — which has drawn only 22 cents on the dollar in recent private sales.
One way to ensure that Treasury is not cheated by banks selling mortgages at inflated prices, he said, would be for Treasury to obtain warrants or ownership rights in the banks. Treasury used that technique last week in taking control of American International Group in exchange for a loan.
Sen. Charles E. Schumer, New York Democrat, is advocating a similar approach.
Richard Beales, analyst with Breakingviews.com, said Congress is right to question the broad power that Treasury is seeking.
“As proposed, it looks like the Patriot Act for Wall Street. Legislators should ask questions and propose checks and balances — now,” he said.
Another potentially contentious part of the bill would enable the Treasury to purchase bad mortgage loans from foreign banks that lend extensively in the United States and have offices here.
While that authority would be used selectively, Mr. Paulson said, he has also been encouraging foreign-government regulators to establish bailout programs to deal with the bad debts of their own nations’ banks.
Mr. Paulson stressed that he will not purchase loans from hedge funds under the plan.
But Mr. Rosner said the Treasury must take responsibility for bad loans made in the U.S. by foreign banks or risk a boycott by foreign banks and lenders that would hurt U.S. consumers and businesses in the future.
“By bailing out these domestic companies, as opposed to letting the markets resolve, the government is accepting product liability and will almost certainly be forced to buy foreign held assets … or be punished with significantly higher Treasury rates and a significantly weaker dollar,” he said.
The price of bailing out foreign banks will be large, Mr. Rosner said: “The size and scope of the bailout will almost certainly grow in the future.”
The move by Goldman Sachs and Morgan Stanley to become bank holding companies was aimed at staving off further difficulties in the markets that have driven down the values of their stocks while limiting their once-ready access to credit.
“While accelerated by market sentiment, our decision to be regulated by the Federal Reserve is based on the recognition that such regulation provides its members with full prudential supervision and access to permanent liquidity and funding,” said Lloyd C. Blankfein, chairman of Goldman Sachs.
“We believe that Goldman Sachs, under Federal Reserve supervision, will be regarded as an even more secure institution with an exceptionally clean balance sheet.”