WASHINGTON The Bush Administration sent a $700 billion plan for a U.S. government bailout of bad mortgage debt to Congress on Saturday, seeking extraordinary authority as it tackles the worst financial crisis since the Great Depression.
Democratic lawmakers, who control both houses of Congress, said they hoped to approve the bailout quickly but wanted changes such as more oversight, limits on executive pay at participating firms, and assistance for homeowners.
U.S. Treasury Secretary Henry Paulson would have extraordinary powers over the massive warchest and his decisions would not be reviewed by any court, according to a copy of the draft legislation obtained by Reuters.
The government could acquire up to $700 billion in home and commercial mortgages and related assets from U.S.-headquartered banks and other institutions over the next two years. Precisely how the purchases would be executed was unclear.
To allow for the bailout, the U.S. government's debt limit would rise to $11.315 trillion from $10.615 trillion.
The bailout plan follows a wrenching week that transformed Wall Street with Lehman Brothers' failure, the agreed sale of Merrill Lynch & Co and a government takeover of ailing insurer AIG.
The debt plan was hatched amid grave concerns that other major banks could collapse and that credit markets were close to freezing, threatening the functioning of the U.S. economy.
Showing more deals may still be in the works, Morgan Stanley's board was scheduled to meet on Saturday to consider a possible takeover by Wachovia Bank or selling a bigger stake to China Investment Corp., according to sources familiar with the situation.
With the House of Representatives and Senate aiming to consider the legislation within days, aides for lawmakers from both parties were expected to pore over the hastily drafted plan through the weekend.
Treasury Secretary Henry Paulson "is in effect becoming the dictator of the American financial system for a few months, subject to congressional oversight," said Wall Street historian John Steele Gordon, author of a book about the national debt.
Congressional Republicans generally praised the Bush plan and called for its swift enactment, while Democrats said it left important questions unanswered and needed work.
U.S. House of Representatives Speaker Nancy Pelosi said Democrats would work with the Bush administration to swiftly respond to the turmoil, but would strengthen the proposal.
"We will also seek to protect lower- and middle-income Americans ... from the fallout of the ongoing Wall Street crisis, by enacting an economic recovery package that creates jobs and returns growth to our economy," she said.
But Senate Republican Leader Mitch McConnell of Kentucky said "now is not the time for partisan plans or pet projects."
New York Democratic Sen. Charles Schumer, chairman of Congress' Joint Economic Committee, whose state hosts many large financial firms' headquarters, said speed was essential despite the plan's shortcomings.
"The aim is to get this on the president's desk by Friday," Schumer told a press conference in New York City.
President George W. Bush said he initially thought the government could deal with the crisis "one issue at time," but the risk of more trouble required bold action to save jobs and retirement accounts.
"I'm sure there are some of my friends out there saying, I thought this guy was a market guy; what happened to him?" Bush said at the White House.
Authorities have turned their focus to part of the underlying problem -- the rising tide of bad mortgage debt.
Banks and other institutions bet heavily on mortgage-backed bonds and other securities that lost value as homeowners struggled to make mortgage payments. The bursting of the housing bubble makes it difficult to value and trade the complex securities, clogging the financial system's workings.
Treasury's purchase plan would at least help price such broken assets, said Jan Hatzius, chief U.S. economist at Goldman Sachs, one of few major investment banks to survive the brutal Wall Street shakeout.
"Congress will want to add a lot of detail over the next few days so things could get pretty confusing," Hatzius said, noting it is not clear how the plan would clarify banks' balance sheets or inject capital into them.
Under the draft legislation, Treasury could hire asset managers to handle the debt purchases, which could include residential or commercial mortgages and related instruments originated or issued on or before September 17, 2008.
The authority to purchase would end two years from the date of enactment, but authority to hold the assets would continue.
Banking industry sources said the government would hold "reverse auctions" in $50 billion tranches to let banks bid assets for government purchase, encouraging the lowest cost to taxpayers. The draft legislation did not include such detail.
A Treasury official said on Friday that hedge funds would not be eligible to offload troubled assets under the plan, but that was not explicit in the draft legislation.
Republican Sen. John McCain and Democratic Sen. Barack Obama, one of whom will inherit the problem after the November 4 election, have skirmished over the financial crisis as they campaigned this week. Both said they were reviewing the plan.
Financial markets have shown approval so far of the Bush administration's latest efforts, but may be disappointed if Congress does not swiftly back the plan.
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 rose 368 points, or about 3.4 percent.
CRISIS WAS SPREADING
The plan to buy back mortgage-related debt was just one measure unveiled in the last two days.
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 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.
(Additional reporting by Karey Wutkowski, Doug Palmer, Jeremy Pelofsky, Emily Kaiser, and Christina Cooke)
(Writing by Tim Dobbyn and Kevin Drawbaugh, editing by Patricia Zengerle)