WASHINGTON – Congressional Democrats considering the Bush administration’s emergency plan to shore up the U.S. financial system on Sunday countered with their own demands, presenting draft legislation giving the government power to cut salaries of chief executives at firms that participate in the bailout and slash severance packages for their top management.
Democratic leaders have broadly embraced the administration’s proposal to spend as much as $700 billion to take troubled assets off the books of faltering firms and are not questioning the need to give the Treasury Department expansive authority to halt the meltdown in world markets. But by attempting to limit executive pay, they risk alienating key Republicans who object to such restrictions and delaying passage of the rescue plan, which in turn may stir renewed fear in the markets.
Sunday night the Federal Reserve said the two remaining investment banks, Goldman Sachs and Morgan Stanley, now will be classified as regular commercial banks. That means that they will be subject to a broad and intensive set of government oversight rules. It also means that there are no remaining stand-alone investment banks.
There were five investment banks at the beginning of the year, but Bear Stearns was bought by commercial bank J.P. Morgan in the spring, Lehman Brothers has gone bankrupt and Merrill Lynch is being acquired by Bank of America.
Treasury Secretary Henry Paulson was working Sunday night to press House leaders to strike an agreement on the bailout bill by early this morning, according to three sources familiar with the matter. No deal with the Senate appeared close Sunday night.
Sources familiar with Treasury’s thinking said Sunday night the department also is continuing to monitor troubled financial firms and may have to intervene in the markets again this week, before Congress acts on the bailout, to address specific flashpoints.
Democrats sought to add oversight provisions and taxpayer protections to the proposal, which amounts to the largest government intervention in the private markets since the Depression. “We will not simply hand over a $700 billion blank check to Wall Street,” House Speaker Nancy Pelosi, D-Calif., said in a statement.
Under the proposal drafted by House Democrats, the Treasury would be required to force faltering firms that want to sell their troubled assets to the government to “meet appropriate standards for executive compensation.” Those standards would include a ban on incentives that encourage chief executives to take “inappropriate or excessive” risks, a mechanism to rescind bonuses paid for earnings that never materialize and limits on severance pay.
Although Democrats long have sought to revamp the structure of compensation on Wall Street, their current demands are focused on financial firms choosing to avail themselves of the bailout.
The Democratic measure also would require the Treasury to use its status as the new owner of billions of dollars in mortgage-backed assets to reduce foreclosures by forcing banks to rewrite loans for distressed homeowners and forgive a portion of their debt. And it calls for a strict regimen of oversight, including independent audits and regular reports to Congress.
The proposal was presented to Treasury officials during marathon negotiating sessions this weekend over the bailout plan. House Republicans sent Treasury a separate set of demands, including the suggestion that a joint committee of Congress be created to oversee the program. And Senate Democrats on Sunday were still assembling a list of provisions they hope to add, including new powers for bankruptcy judges to modify mortgages on primary residences, an idea House Democrats said Sunday they had abandoned.
Though lawmakers had promised to work across party lines and between chambers to speed the rescue plan to passage by Friday, that process was not working smoothly.
Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee, said it’s still possible to meet the deadline. But “this is of such import, if it takes a little longer to get right, then so be it,” Dodd said. “I’m all for moving as quickly as we can, but I’m far more interested in getting it right.”
On the Sunday morning television talk shows, Paulson said he has asked his counterparts in other nations to consider establishing similar programs.
On Sunday, British Prime Minister Gordon Brown said he would travel to New York on Wednesday to discuss what he called the “first crisis of the global economy.” Brown said a “global regulatory system” should be established to govern a world where national borders often have little meaning. He added that Britain “was paying a price” for problems that started in the United States.
Though lawmakers on Capitol Hill were not working in unison, they were voicing similar concerns Sunday about whether the bailout plan includes enough oversight and protections for taxpayers.
The administration’s proposal would give the Treasury secretary sweeping authority to purchase assets from any financial institution, whether based in the United States or abroad, over the next two years. It would place no limit on when the assets could be sold. And it would allow the Treasury secretary to spend as much as $700 billion without oversight or review by other federal agencies or the courts.
“It’s the biggest amount of money with the least amount of detail I think I’ve ever seen in my life,” said Douglas Elmendorf, a Brookings Institution economist who has worked in the Treasury Department and at the Federal Reserve. “The secretary does whatever he wants and spends whatever he wants.”
Lawmakers across the spectrum are demanding more oversight of the bailout. House Democrats have the most specific proposal, which would order the Government Accountability Office to establish a permanent outpost within the Treasury to monitor the bailout program. That office would have unfettered access to the activities and financial documents of the rescue program and be required to submit reports to Congress every 60 days.
Many lawmakers also want additional protections for taxpayers. House Republicans, for example, have asked that any profits generated by the sale of the bad assets be used to reduce the budget deficit and not for any other purpose.
Where the parties appear to diverge is over Democrats’ demand for government authority over the paychecks of executives whose companies participate in a taxpayer bailout. House Republicans opposed the idea, aides said, and Sen. Richard C. Shelby, R-Ala., a key figure in the debate, said Sunday on CBS’s “Face the Nation” that he thinks compensation should be set by corporate boards.
Speaking on the same program, Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, said voters would protest a program that appears to permit corporate executives to pocket taxpayer dollars.
“It would be a grave mistake to say that we’re going to buy up the bad debt that results from the bad decisions of these people and then allow them to get millions of dollars on the way out the door,” Frank said. “The American people don’t want that to happen, and it shouldn’t happen.”
The idea does have a recent precedent: When regulators took over mortgage financiers Fannie Mae and Freddie Mac this month, they not only removed the firms’ top executives but also eliminated $12.59 million in “golden parachutes” that had been promised in severance pay and bonuses. The executives, Daniel Mudd, of Fannie Mae, and Richard Syron, of Freddie Mac, will now get a combined $9.43 million upon their exit.
Speaking on “Fox News Sunday,” Paulson acknowledged “excesses” in executive compensation but said the debate should be put off for another time.
“If we design it so it’s punitive and so institutions aren’t going to participate, this won’t work the way we need it to work,” Paulson said.
Paulson expressed more openness to the idea of foreclosure relief for homeowners whose loans are being financed by the securities the government would buy. “I think there should be a mortgage relief component to this,” he said, without elaborating further.
For nearly a year, Paulson has touted an initiative that calls on banks to voluntarily modify mortgages held by struggling homeowners so they can stay in their homes. Paulson said in a recent interview that this effort, called Hope Now, has helped 1.7 million households. But Democrats are skeptical, noting that the data are vague about the extent of assistance provided.
Paulson again warned lawmakers to resist adding too many provisions to the bill.
“We want this to be clean, and we want this to be quick, and it’s urgent that we get this done,” he said.