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US congress heads condemn bail-out

Sep 23 2008

US congress heads condemn bail-out

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Economy

By Agencies

Differences remain over compensation for executives of rescued companies [EPA]

US congressional leaders have condemned the Bush administration's $700bn financial bail-out plan aimed at ending more than a week of turmoil on global financial markets.

Chris Dodd, the Democrat chair of the senate banking committee, said on Tuesday: "What they have sent us is not acceptable. This is not going to work."

Richard Shelby, the most senior Republican on the committee, said "We have got to look at some alternatives."

The plan would give the government broad power to buy the debt of any US financial institution for the next two years and would increase US national debt from $10.6 trillion to $11.3 trillion.

The proposal does not specify what the government would get in return from financial companies for the federal assistance.

Congress is expected to vote in the next few days on the proposals with both Republicans and Democrats hoping for a quick resolution to the crisis.

Ben Bernanke, the US Federal Reserve chairman and Henry Paulson, the Treasury Secretary, had earlier urged the US Congress and politicians to pass the bail-out.

Bernanke told the committee that, despite unprecedented steps already taken in the crisis, global financial markets "remain under extraordinary stress".

'A preventable situation'

Dodd said he was "angry" about being faced with a crisis that was "a preventable, avoidable situation" created by a political climate he described as "basically an eight-year coffee break."

'King' Henry

The scramble to steady the US financial ship has left one man with enormous power to steer its course, with some already calling Henry Paulson, the treasury secretary, "King Henry".

Paulson had the same powers as his predecessors until a couple of weeks ago: oversight of the government's taxation and fiscal policies.

But as the financial storm erupted, with some institutions crumbling, sold or bailed out, Paulson's new job description has changed substantially.

If approved by congress, his rescue plan would give him sole control of a $700bn line of credit, and the power to use it to take on any bad mortgage-related debt he chooses.

Congress, and the two main presidential candidates, John McCain and Barack Obama, have called for greater oversight of such powers.

"You had regulators sitting back as loans were being made with no documentation ... predatory lenders taking advantage of the situation - that's how this all unfolded. It's not a mystery," Dodd said.

Dodd has proposed a number of amendments to the package, including a provision to allow the government to take a stake in the companies it bails out, limits on compensation for company bosses and severance packages of rescued firms and additional help for American homeowners facing repossession of their homes.

Democrats, who control both chambers of congress, said that the White House had agreed to the creation of a board to monitor the bail-out, one of their key demands, but differences remain on levels of compensation for executives of rescued companies, or whether they should receive anything at all.

"We are not sending a blank cheque to Wall Street," Nancy Pelosi, the House speaker, said after holding bipartisan talks on Monday.

Paulson has argued the bail-out will prove cheaper for taxpayers than leaving companies to suffer the cost of the crisis themselves.

Some critics have expressed concern over the unprecedented power that the plan would give Paulson and the US government in the financial markets.

George Bush, the US president, warned congress a day earlier that "failure to act would have broad consequences far beyond Wall Street".

Stock falls

The Dow Jones industrial average, the Nasdaq composite, and the Standard & Poor's 500 index all lost a few points with over three hours left in the session.

In early afternoon trading, the Dow fell 16.64, or 0.15 per cent after having risen more than 125 points in the early going.

On Monday, the Dow fell by 373 points as unease over the government rescue plan sent investors scrambling for the safety of hard assets like oil and gold.

The FTSEurofirst 300 index of top European shares ended 1.5 per cent lower on Tuesday, extending Monday's 2.1 per cent slide after a record surge on Friday when news of the plan emerged and several countries instituted short-selling
bans. Germany's DAX fell 0.8 per cent.

Asian equities fell 2.2 per cent, excluding Japan, as Japanese financial markets were closed for holiday on Tuesday.