A $700 billion financial rescue plan was sent to Congress Saturday, and Democrats moved quickly to propose changes—including possible help for homeowners and a salary cap for CEOs.
Democrats also are pushing for a new $100 billion economic stimulus package, although it's not clear if that would be part of the Wall Street bailout or be voted on separately.
The Bush admistration's plan to move toxic mortgage-related debt off the balance sheets of U.S. banks and other institutions—and into a massive government portfolio—represents an all-out attack on the worst financial crisis since the Great Depression.
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Under authority sought by the Treasury Department, the government could purchase as much as $700 billion in mortgage-related assets from U.S.-headquartered institutions. The Treasury, meanwhile, is floating the idea of having Wall Street asset managers oversee the toxic debt, CNBC has learned
The participation of banks in the problem loan pool will be "primarily American" with some participation by US-affiliates of foreign banks, Congressional leaders told CNBC. Foreign governments would not be eligible under any scenario currently under discussion, they said.
Congressional leaders also said the Treasury's initial proposal "has nothing in it" as of now because Treasury Secretary Henry Paulson is pushing for maximum flexibility.
The legislation also does not currently include warrants for the government to take stakes in participating institutions, as it did in the AIG bailout, these leaders said.
There is a very strong push from some Democrats to include salary restrictions for CEOs of participating financial institutions. But Paulson is resisting the idea, calling it a "poison pill."
Democrats also are seeking to include something for "Main Street" in the bill, such as relief for distressed mortgage holders.
House Speaker Nancy Pelosi initially was inclined to accept Paulson's wish that a second economic stimulus plan not be included in the bill. But some Democratic members are pushing back, trying to get it attached in return for support.
The outcome may hinge on how many Republicans defect and oppose the package. The more Republican who vote no, the more Democrats have leverage to insist on their terms.
So far, Republican support has appeared reasonably strong, but that could change quickly as the jockeying in Congress continues.
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The Treasury's bailout proposal is just one of a series of measures unveiled in the past few days as the Treasury and Fed try to unfreeze credit markets and prevent a growing storm that could engulf the global economy.
The Treasury said on Friday it would siphon up to $50 billion from a fund established in the 1930s to backstop the rattled U.S. money market mutual fund industry. This long-safe corner of financial markets, home to some $3.5 trillion of deposits, has increasingly appeared at risk
Money market fund assets dropped by a record $169.03 billion in the week ended September 17 as jittery investors pulled money out.
The Securities and Exchange Commission also imposed a 10 trading-day ban on short sales of 799 financial stocks.
As the government brought out the big guns to tackle the financial crisis, investment bank Morgan Stanley bought itself some time to come up with a plan for its future and talked to Wachovia and other banks about a merger.
On Saturday, a U.S. bankruptcy judge approved British bankBarclays' deal to purchase the core U.S. business of Lehman Brothers Holdings .Congressional leaders have promised swift action on the bailout package but many details are still to be worked out.
New York Democratic Sen. Charles Schumer, chairman of Congress' Joint Economic Committee, said the government plan is a good start.
"But it includes no visible protection for taxpayers or homeowners. We look forward to talking to Treasury to see what, if anything, they have in mind in these two areas," he said.
Schumer added that Congress hopes to pass the plan this week. "The aim is to get this on the president's desk by Friday," Schumer said at a news conference.
As lawmakers' aides huddled on Capitol Hill, President Bush acknowledged the plan would put large amounts of taxpayer money on the line to buttress shaky markets.
"But I'm convinced that this bold approach will cost American families far less than the alternative," he said in his weekly radio address. "Further stress on our financial markets would cause massive job losses, devastate retirement accounts, further erode housing values, and dry up new loans for homes, cars and college tuitions."
After government takeovers of individual firms in recent months failed to stop spreading credit turmoil, U.S. authorities are turning their focus to part of the underlying problem -- the rising tide of bad mortgage debt choking the financial system.
The draft legislation said Treasury could hire asset managers to handle debt purchases, which could include residential or commercial mortgages and related instruments that were originated or issued on or before September 17, 2008.
The authority to purchase ends two years from date of enactment, but the authority to hold the assets would continue.
Banking industry sources said "reverse auctions" would be held to purchase $50 billion tranches of debt, which could include residential and commercial mortgages and mortgage-backed securities. But that level of detail was not spelled out in the draft legislation.
A Treasury official said Friday that hedge funds would not be eligible to offload troubled assets under the plan, but that was not explicit in the draft legislation.
Congressional committees were to be briefed on Saturday on the legislation, which could be considered by the U.S. House of Representatives and Senate as early as next week.
Democrats have said they might try to use the financial bailout legislation to reduce home foreclosures and put some limits on the pay of corporate chief executives.
"We must not forget Main Street as we work to address the crisis on Wall Street," Senate Majority Leader Harry Reid, a Nevada Democrat, said on Friday.
The financial crisis has dominated the U.S. presidential campaign this week with Republican Sen. John McCain Barack Obama skirmishing over the proper government role.
And some members of Bush's Republican Party are upset with the government's increasing involvement in the private sector.
"The free market for all intents and purposes is dead in America," said Kentucky Sen. Jim Bunning. The Treasury proposal would "take away the free market and institute socialism in America," he said in a statement on Friday.
But financial markets have shown their approval and may be disappointed if Congress does not swiftly back the measures.
U.S. stocks had their best day in six years on Thursday on talk of an aggressive plan. On Friday the Dow Jones industrial average <.DJI> rose 368 points, or about 3.4 percent.
The Treasury and Federal Reserve have already put nearly $1 trillion of taxpayer money on the line to help credit flows.
And banks worldwide have suffered more than $500 billion of write-downs and loan losses since the global credit crisis began more than a year ago.
The crisis grew more acute this month with government takeovers of mortgage companies Fannie Mae and Freddie Mac; the bankruptcy of Lehman Brothers Holdings; Merrill Lynch's shot-gun agreement to be bought by Bank of America; and a bailout of insurer AIG. This came just six months after a government-backed rescue of Bear Stearns.
The plan to buy back mortgage-related debt was just one of a series of measures unveiled in the last two days as the Treasury and Fed decided the frozen credit markets signaled a growing storm that would engulf the economy.
The Treasury said on Friday it would siphon up to $50 billion from a fund established in the 1930s to conduct foreign exchange market intervention to backstop the rattled U.S. money market mutual fund industry.
This long-safe corner of financial markets, home to some $3.5 trillion of deposits, has increasingly appeared at risk of falling victim to the year-old credit crunch. Money market fund assets dropped by a record $169.03 billion in the week ended September 17 as jittery investors pulled money out.
The U.S. Securities and Exchange Commission got involved too, imposing on Friday a 10 trading-day ban on short sales of 799 financial stocks.
And the administration will step up a program announced this month to directly buy mortgage-backed securities in the market, and said Fannie Mae and Freddie Mac would also increase their buying to try to get credit flowing.
Bush said he initially thought the government could deal with the trouble on Wall Street "one issue at time."
But the financial "house of cards was much bigger, and it started to stretch beyond just Wall Street in the sense of the effects of failure," he said at a White House event with Colombia's President Alvaro Uribe on Saturday.
—Reuters contributed to this report