KEY POINTS:
The Bush administration's plan for a US$700bn bail-out of financial markets was savaged today by lawmakers on Capitol Hill, who demanded more time to consider the potential costs to the taxpayer.
They also insisted on additional measures to punish Wall Street for excesses that have taken the economy
to the edge of disaster.
In a piece of political theatre more closely followed by the world's financial markets than any in memory, lawmakers demanded more details of which firms would benefit, called for extra help for the American homeowners at the sharp end of the credit crisis, and suggested that bank executives accept a cap on their pay in return for the government help.
Ben Bernanke and Hank Paulson, the college professor and the Wall Street boss who have found themselves fighting to save the world financial system, went to Capitol Hill yesterday to try to sell a plan launched at the height of the financial panic last week with high hopes of cross-party support.
But at the hearing in front of the Senate banking committee, lawmakers passed on the furious reaction of their constituents, who see an unprecedented sum of taxpayer money being used to rescue banks brought low by their ill-advised investments in toxic mortgage derivatives.
Mr Paulson, who left Goldman Sachs to become Treasury secretary two years ago, said that thousands of banks and other financial institutions - including foreign firms - would be eligible to sell those derivatives to the US government, in an effort to get the credit markets moving again.
And Mr Bernanke, who has been chairman of the Federal Reserve since 2006, said that the government's unprecedented intervention might just end up being relatively modest, if it encourages other investors to finally start buying the toxic assets that are currently impossible to value.
Members of the Senate banking committee none the less lashed out at Mr Paulson in particular for presenting them with an open-ended plan, short on detail, which would hand him extraordinary powers to spend taxpayer money with little Congressional oversight and fewer restraints on how the cash is used.
Several said that the plan was viewed with fury by constituents, who saw the government handing taxpayer money to greedy Wall Street bankers who should pay for the recklessness has brought the financial system to the abyss.
Jim Bunning, a Republican Senator, said the plan would "take Wall Street's pain and spread it to the taxpayers".
And Richard Shelby, the most senior Republican on the committee, said Congress probably wouldn't solve this crisis by "spending a massive amount of money on bad securities".
A grim-faced Mr Paulson agreed that the blame lay with excesses on Wall Street and the failure of regulators, but that his US$700bn bail-out plan was better than letting financial markets fail.
"You're angry and I'm angry that taxpayers are on the hook.
"But guess what, they are already on the hook for the system we all let happen," he said. "If the system doesn't work the way it needs to work, people aren't going to get the loans they need."
Mr Bernanke, one of the world's foremost scholars on the causes of the Great Depression in the 1930s, said jobs would be lost and economic growth would shrivel if there is no end to the crisis on Wall Street.
The losses on mortgage derivatives - which have now passed US$500bn - have already caused financial institutions to shrink their activities and made it difficult for people to get mortgages.
An all-out panic could cut off funding to business throughout the economy, he said.
"I'm a college professor," he told lawmakers. "I was criticised for taking this job without having worked on Wall Street. I have no interest or connections on Wall Street. My interest is solely for the strength and recovery of the US economy."
The Treasury is still hashing out the details of the legislation that will be presented to Congress, it hopes within hours.
Democrats appeared last night to have won concessions that would bolt on new provisions to help homeowners struggling against foreclosure.
The gummed-up credit markets showed only modest improvements. Demand for short-term US government debt eased a little. Cash was flowing back into money market funds, the epicentre of last week's panic.
Messrs Paulson and Bernanke set out new details of how the bail-out plan could work.
The US$700bn may not all be spent.
The government will buy in tranches, using different pricing mechanisms for different types of assets.
Experts would be called in to help design reverse auctions and other systems for determining a price for the toxic derivatives.
The aim, Mr Bernanke said, was to find a value that reflected how much money the holders of the underlying mortgages and other loans would ultimately pay back.
Only by finding a proper price could confidence be restored to the markets and new investors be tempted to buy these assets and to recapitalise the battered banks that have lost money on them.
- INDEPENDENT
