WASHINGTON – Federal regulators rolled out the first pieces of their sweeping plan to end the nation’s financial crisis Friday, moving to insure up to $2 trillion in money market mutual funds and temporarily barring investors from betting on the decline of financial company stocks.
The moves came as lawmakers awaited the keystone of the new panic-fighting plan – the proposal for a federal takeover of the troubled mortgage assets that now clog the books of banks and securities firms.
Exactly how the takeover would be accomplished – and at what potential cost to taxpayers – is still being worked out inside the Bush administration. Concerns were raised Friday, however, by Republicans anxious about the price tag and by Democrats who fear that the rescue plan would favor high-flying financiers over ordinary Americans.
Still, expectations for a comprehensive rescue plan led to a strong rally on Wall Street for a second straight day, with the Dow Jones industrial average posting its biggest back-to-back point gains in more than eight years.
“This is a pivotal moment for America’s economy,” President Bush said during a brief appearance in the White House Rose Garden. “We must act now to protect our nation’s economic health from serious risk. There will be ample opportunity to debate the origins of this problem. Now is the time to solve it.”
The chief architects of the latest effort, Treasury Secretary Henry M. Paulson Jr. and Federal Reserve Chairman Ben S. Bernanke, gave new hints about the dimensions of their proposal, which would likely be the largest government intervention in the financial markets since the 1930s.
“We’re talking hundreds of billions,” Paulson told a morning press conference. “This needs to be big enough to make a real difference and gets to the heart of the problem.”
The two men spent much of their day on the phone pleading for speedy action by Congress on their “bad asset” plan, and lawmakers who spoke with them said the pair presented a sobering picture of just how fragile financial markets have become.
“All of us are prepared to do whatever we can this weekend … to fashion a proposal that will get us out of this mess,” said Senate Banking Committee Chairman Christopher Dodd, the Connecticut Democrat who was expected to shepherd the plan through the Senate. “We understand the gravity of the moment.”
Beneath the surface, however, members of Congress and outside analysts began to show signs of questioning the administration’s approach. And with the Nov. 4 presidential election only weeks away, political tensions inevitably began to surface as well.
On Capitol Hill, conservative Republicans expressed outrage over the administration’s move away from free-market-first principles.
“At this point, Congress is being asked to support an uncertain entity, costing an uncertain amount of dollars, for an uncertain duration – a decision that will have implications for generations to come and requires absolute certainty,” said Rep. Jeb Hensarling, R-Texas, a leader of House conservatives.
“My fear is that taxpayers will be left with the mother of all debts.”
Meanwhile, Democrats complained that the White House is offering too much help to financial companies who bet big on risky mortgage investments, and not enough to people losing their homes to foreclosure.
They expressed special irritation with what they described as Paulson’s insistence that Congress approve the administration proposal “clean,” without any aid for troubled homeowners or regulations aimed at preventing a repeat of the current disaster.
Even policy analysts who are generally not averse to government intervention in the economy seemed taken aback by the apparent scale and aggressiveness of what the administration and the Fed have in mind.
Robert E. Litan, an ex-Clinton administration Treasury official who is now a senior analyst with the Brookings Institution, said the new plan seems to invite banks and securities firms to dump their very worst assets on the government with no clear way for Washington to rid itself of them.
“What they’re going to get is the financial equivalent of radioactive waste,” he warned.
Earlier in the week, the Dow Jones average fell to its lowest level in almost three years as giant financial institutions teetered on the verge of collapse, and global credit markets seized up as banks hoarded their cash.
Financial markets began recovering Thursday, when federal officials expressed support for a comprehensive plan to defuse the crisis.
On Friday, Treasury announced a $50 billion program to stabilize the nation’s money market mutual funds, which traditionally have been among the safest investments available to individuals and institutions but that had begun to show cracks as the financial crisis has gotten progressively worse.
Treasury staffers briefing reporters on background said that Washington is offering to insure funds containing $2 trillion of investment, or about as much again as the government insures in bank deposits, in order to stanch a run on the funds as investors sought still safer places for their money.
Officials said that fund managers will have to pay a fee for the insurance and that, as now envisioned, the program will last only one year. They said that in contrast to federal deposit insurance, which covers up to $100,000, the money market insurance will cover unlimited amounts.
Separately, the Securities and Exchange Commission issued an emergency order barring traders from selling short the shares of 799 financial stocks for at least 30 days.
Shorting is the practice of borrowing shares of a company and then selling them, in hopes that their value will fall. When that happens, short sellers buy the shares back at a lower price to repay the loan, reaping a profit.
Financial companies loaded with bad debt had become frequent targets for “shorts,” and the SEC said it had become concerned that the practice “may be causing sudden and excessive fluctuations of the prices of such securities in such a manner so as to threaten fair and orderly markets.”
Rep. Barney Frank, chairman of the House Financial Services committee, said the plan was most likely to grant the U.S. Treasury authority to buy up bad debt and not create a stand-alone agency like the Resolution Trust Corp., which was formed in 1989 to sell off the assets of failed savings and loan institutions. The primary reason, he said, is that Treasury could move more quickly to buy troubled assets.
“What we’re talking about now is the Treasury Department probably buying up paper, securities, bad debt,” Frank said in an interview on C-Span.