Treasury Secretary Paulson differed with Senate Banking Committee members today over his $700 billion proposal to buy the bad mortgage assets of troubled banks, especially over a bid to allow the federal government to get an equity stake of firms that participate. Paulson faced a skeptical panel concerned that his plan lacked safeguards to protect taxpayers and hold firms accountable. Banking ranking member Richard Shelby set the tone early. "If the government is going to get into the bailout business, shouldn't we be focusing our resources on average Americans, rather than sophisticated and well-compensated bankers?" he asked. A major point of contention was a proposal by Sen. Jack Reed, D-R.I., to grant Treasury warrants to buy stock in firms that participate, so the government could make a profit if the firms' stocks rise later.
Paulson said it could make companies more hesitant to participate. "This is not about the companies; this is about the American people. We need something to work," Paulson said. Reed protested: "Mr. Secretary, you're suggesting that these very brilliant financial people who run these companies would risk the failure of their enterprise by not participating in this auction because now we have been told that the contingent [stock] will be deployed to the taxpayers." Paulson said he would prefer to allow the mortgage assets to gain value and later sell them to garner profits for the Treasury. He said the bailout is unlike past ones given the firms that would participate have not failed, making disincentives troublesome. Reed was not satisfied and felt some banks not teetering near collapse could make out well. "One other way to describe what you just said is that some institutions that don't need help will be given help for free," he said.
Sen. Mike Crapo, R-Idaho, said he also was concerned and asked if the program could be restricted to the most troubled banks instead of those in a better position only looking to get rid of bad debt. Federal Reserve Chairman Bernanke said he would prefer a program that had broad authority because "this is a systemwide problem." Sen. Charles Schumer, D-N.Y., said the two had talked about using about $50 billion at a time to purchase debt, focusing on specific tranches of devalued mortgage-backed securities. Schumer asked if Congress could provide $150 billion to see how the program works before providing additional funds. "Maybe the market would have stabilized and you actually made money. Why ask for the full $700 billion?" Schumer said. Paulson said he needed as much as flexibility as possible. "We need the full authority at that size to do the job," Paulson said. In his testimony, Paulson said he would accept inclusion of an oversight board but opposed language to require banks that take federal aid to accept a change in bankruptcy law allowing judges to reduce the principal of mortgage to current market value. He was noncommittal on expanding anti-foreclosure programs, such as a new $300 billion program that would allow at-risk borrowers to refinance into fixed loans guaranteed by the Federal Housing Administration. Banking Chairman Christopher Dodd and House Financial Services Chairman Barney Frank are negotiating with Paulson to strike a deal this week.
This article appears in the September 27, 2008 edition of National Journal Daily PM Update.