Senior Democrats signalled hard bargaining ahead on the Bush administration’s proposed $700bn bailout for the country’s financial institutions as officials met members of Congress over the weekend to seek bipartisan agreement on the package.
The plan to quell turmoil on the financial markets would allow the government to buy the toxic assets of any US institution for the next two years, raising the legal ceiling on the national debt from $10,600bn to $11,300bn.
President George W. Bush said: “We’re going to work with Congress to get a bill done quickly.” Treasury officials and members of Congress were meeting to secure broad agreement on the package by the time world markets re-open on Monday. Legislation could pass early next week.
In a statement on the package, Democratic senator Max Baucus said the Senate Finance Committee he chairs was the watchdog of public debt, “and with $700bn on the table you’d better believe we’re patrolling the yard for taxpayers.”
He said: “I will work to include mechanisms in this bill that keep the burden of this bailout off taxpayers, mostly by making reasonable requirements of the companies asking for this emergency help.”
Mr Baucus also said he would consider the potential implications of the financial crisis for Americans’ retirement security.
The plan is aimed at restoring confidence in the financial system by allowing US institutions to transfer their bad debt to the government.
The draft legislation would authorise the Treasury to: “purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.”
Henry Paulson, Treasury secretary, who would be charged with executing the bailout plan, said: ”We must now take further, decisive action to fundamentally and comprehensively address the root cause of our financial system’s stresses. The federal government must implement a programme to remove these illiquid assets that are weighing down our financial institutions and threatening our economy.”
President Bush said the administration was faced with preventing the collapse of a financial “house of cards”. “People are beginning to doubt our system, people were losing confidence and I understand it’s important to have confidence in our financial system.” he said.
He said the risk of doing nothing far outweighed the risk of the package. He assured taxpayers that over time they would get a lot of their money back.
At the height of the presidential election campaign, attention on the crisis has focused on demands that the rescue package should help not only Wall Street but also “Main Street” where ordinary Americans are already faced by foreclosures, job losses, and high food and energy prices.
Presidential candidates Barack Obama and John McCain are vying with each other to convince voters that their plans for the economy have the best chance of succeeding while protecting taxpayers. However, Nancy Pelosi, Democratic speaker of the House, has assured the administration Mr Obama’s party is committed to “quick, bipartisan action”.
Senator McCain spoke of the need to ease the burden on “hardworking middle-class Americans”. He called on all parties to support proposals he laid out on Friday for a Mortgage and Financial Institutions (MFI) trust plan that he said would resolve troubled financial institutions, enforce discipline on management and shareholders, and minimise the burden on the taxpayer.
Charles Schumer, New York Democratic senator, said on Saturday: “This is a good foundation of a plan that can stabilise markets quickly. But it includes no visible protection for taxpayers or homeowners. We look forward to talking to the Treasury to see what, if anything, they have in mind in these two areas.”
Mr Obama, speaking in Florida, attacked his presidential rival’s plans to privatise social security, linking them to the financial crisis.
“If my opponent had his way, the millions of Floridians who rely on it would have had their Social Security tied up in the stock market this week. Millions would have watched as the market tumbled and their nest egg disappeared before their eyes.”
The McCain Camp accused Mr Obama of using scare tactics and said the Republican candidate was “100 per cent committed to preserving Social Security benefits for seniors, and Barack Obama knows it”.
The bail-out plan came after stock markets around the world roared their approval on Friday to news of plans for significant government action.
Shanghai surged 9.5 per cent, in the biggest daily gain for seven years, to 2,075.091. Hong Kong ’s Hang Seng gained 9.6 per cent to 19,327.73, breaking a seven-day losing streak. In London the FTSE 100 had its biggest daily gain in its 24-year history, jumping 8.8 per cent, while in New York the S&P 500 closed up 4.0 per cent, having risen 4.3 per cent on Thursday. The rallies in London and the US were partially fuelled by bans on short-selling in financial stocks announced on Thursday night.
The political negotiations on the rescue plan, which followed a week of unprecedented stress in global financial markets, envisage the most extensive peacetime expansion of the role of government in the financial system since the Great Depression and appeared to many to mark the end of an era of Reaganite deregulation.
In addition, the Bush administration has announced a blanket guarantee on all money market mutual funds, in an effort to curtail a brewing crisis in the $3,500bn (€2,422bn) sector. The Federal Reserve announced new plans to support liquidity in the mutual fund sector.