Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson urged Congress to approve a $700 billion bailout of the financial system to avert a serious blow to the economy.
“Action by the Congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy. … The Federal Reserve supports the Treasury’s proposal to buy illiquid assets from financial institutions,” Mr. Bernanke said in the prepared remarks today before the Senate Banking Committee.
But the Fed chief also qualified his support, saying the “development of a comprehensive proposal for reform would require careful and extensive analysis that would be difficult to compress into a short legislative time frame now available.”
The plan, involving government purchases of assets that cannot currently be priced in the absence of a market, requires congressional approval.
Mr. Paulson said in prepared comments that the proposal will help “avoid a continuing series of financial institution failures and frozen credit markets that threaten American families’ financial well-being, the viability of businesses both small and large, and the very health of our economy.”
The Treasury secretary justified the plan, which would inflate the U.S. debt to an elevated 70% of the gross domestic product, saying that “the ultimate taxpayer protection will be the market stability provided as we remove the troubled assets from our financial system.”
Mr. Paulson repeatedly emphasized the urgency of his request, saying, “You all can be glad you gave us a bazooka because we needed it,” referring to an expression he used during his attempt to stabilize mortgage lenders Fannie Mae and Freddie Mac.
During the question-and-answer session, many lawmakers expressed concern about being asked to sign off on a huge blank check without knowing more details of the program.
One potential compromise, floated by Sen. Charles Schumer, D-N.Y., would limit the Treasury Department’s authority to $150 billion initially, with Treasury officials allowed to come back to Congress for additional financial authority in January.
“I think that (Mr. Schumer’s proposal) would be a grave mistake,” Mr. Paulson said, insisting the full authority was needed to restore market confidence.
Nonetheless, Mr. Schumer’s proposal drew support from Sen. Bob Corker, R-Tenn., while Senate Banking Committee Chairman Christopher Dodd, D-Conn., said: “I’d leave the door open a little bit if we’re looking for some consensus here.”
Mr. Paulson also said the Treasury Department would not go through federal bidding procedures to recruit the money management experts required to value the troubled assets, drawing criticism from several senators.
Also during the hearing, SEC Chairman Christopher Cox asked that his agency be allowed to regulate the credit default swap market.
“Importantly, CDS buyers do not have to own the bond or other debt instrument upon which a CDS contract is based,” Mr. Cox said. “This potential for unfettered naked shorting and the lack of regulation in this market are cause for great concern. … I urge you to provide in statute the authority to regulate these products to enhance investor protection and ensure the operation of fair and orderly markets.”