ECONOMY

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19 September 2008
Bush Seeks Quick Congressional Action on Financial Crisis

By Elizabeth Kelleher and Merle D. Kellerhals Jr.
Staff Writers

Related:
 • Statement by President Bush on U.S. Economy

Washington — Saying "hundreds of billions" of taxpayer dollars are needed to buy bad mortgage loans and shore up the U.S. financial system, Treasury Secretary Henry M. Paulson Jr. pledged to spend the weekend of September 20 working with Congress on legislation he hoped would be passed as early as the following week.

In speaking to the media September 19, Paulson said the relief package has to be "big enough to make a real difference and get at the heart of the problem."

Paulson, Federal Reserve Chairman Ben Bernanke and Securities and Exchange Commission Chairman Christopher Cox met with congressional leaders late into the evening September 18 to explain the crisis, where it is headed if no further action is taken and what kind of legislative remedy is needed to achieve a comprehensive recovery.

President Bush, speaking at the White House September 19, thanked congressional leaders for their willingness to consider sweeping legislation recommended by Paulson, Bernanke and Cox.

Bush said the three briefed Congress on the urgent need for legislation to allow the federal government to buy up illiquid assets, such as faulty mortgages, from banks and other financial institutions. "This is a decisive step that will address underlying problems in our financial system," he said.

Referring to the proposed legislation as a "troubled asset relief program," Paulson told the media that the government would like to buy the bad debt with taxpayer money, thus freeing up financial institutions to make productive loans, which would aid individuals and businesses and spur economic growth.

He said that just as the type of homeowners delinquent on mortgage loans has expanded from those caught up by subprime lending to those who took out "less-risky mortgages," a similar scenario is playing out among lenders. The crisis increasingly is harming more responsible lenders that have exercised sound practices.

Bush said the crisis has become a pivotal moment for America's economy. What began as a crisis in the credit markets and first appeared in the housing industry, caused primarily by risky mortgage lending, now has spread throughout the entire financial system and threatens global economic stability, Bush said. It was the third time in a week that Bush has made remarks on the escalating financial crisis.

The president canceled travel and campaign stops to focus on the economic crisis. In recent days, the government has addressed problems at mortgage packagers Fannie Mae and Freddie Mac, worked with market participants to prepare for the failure of investment banking firm Lehman Brothers and loaned money to insurer AIG so that it can sell assets in an orderly manner. The U.S. Federal Reserve joined several other central banks to pump money into short-term credit to bolster world credit markets. On September 19, the U.S. Treasury announced a temporary guaranty program for the U.S. money market mutual fund industry.

"Despite these steps, more is needed," Paulson said.

Recent measures were designed primarily to stop the problems of individual firms from spreading more broadly, Bush said. The measures to be taken next will address the root causes that have triggered instability in the credit markets — the mortgage assets that have lost value during the housing decline and that now restrict the flow of credit, he said.

Bad loans are "parked, or frozen," on the balance sheets of banks and other financial institutions, making it impossible to determine the worth of mortgage assets or the financial condition of institutions that own them, according to Paulson.

While the administration’s proposal involves a "significant investment of taxpayer dollars," it will result in stability for the U.S. financial system, which Paulson called the "ultimate taxpayer protection."

Congress appears ready to act. Senator Christopher Dodd, chairman of the Senate Banking Committee, said, after meeting with administration officials about the financial crisis, "I am committed to working with the administration and my Democratic and Republican colleagues in Congress to develop robust solutions to these serious problems." He called the administration’s proposals "constructive," but cautioned that legislation "must include relief for millions of American homeowners facing foreclosure." (Five million U.S. homeowners are now delinquent or in foreclosure on their loans.)

House Speaker Nancy Pelosi said September 19 that she had spoken to the president in the morning and had told him, "We are committed to quick, bipartisan action." She said Congress stands ready to work beyond its targeted adjournment date the week of September 22 to consider legislative solutions to the crisis.

Even if Congress quickly passes relief legislation, there still will be work to do. "Our next task must be to improve the financial regulatory structure so that these past excesses do not recur," Paulson said. But he hinted that he expects the next administration and post-election Congress to take up regulatory reform: "That is a critical debate for another day," he said.

Pelosi, for her part, said she already has asked Representative Barney Frank, the chairman of the House Financial Services Committee, and Representative Henry Waxman, the chairman of the House Oversight and Government Reform Committee, to hold hearings in September and October to investigate regulatory failures and mismanagement.

Speaking of the need to remove illiquid assets from the books of financial institutions, Bush said that the risk of failing to act now is enormous.

"Further stress on our financial markets would cause massive job losses, devastate retirement accounts and further erode housing values, as well as dry up loans for new homes and cars and college tuitions," Bush said. "Government intervention is not only warranted, it is essential."

See "Government Rescues Two Biggest Mortgage Companies," "Federal Reserve Holds Funds Rate Steady Amid Market Turmoil," "Central Banks Pump Billions into Short-Term Credit."

See also the text of the Treasury Department announcement of a guaranty program for money market funds.

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