September 23, 2008 / 1:36 PM / 9 years ago

Paulson and Bernanke push Congress on bailout

WASHINGTON (Reuters) - U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke on Tuesday urged Congress to act swiftly on a proposed bailout of the financial system and warned of dire consequences if they delay.

In prepared testimony that the two are scheduled to deliver at 9:30 a.m. EDT before the Senate Banking Committee, they warned financial markets are in serious stress and the best chance for stabilizing them is to remove illiquid assets.

“Action by Congress is urgently required to stabilize the situation and avert what could otherwise be very serious consequences for our financial markets and our economy,” Bernanke said.

He and Paulson will answer lawmakers’ questions about a proposed $700-billion bailout that would have Treasury buy bad assets from financial institutions and hold them until they could be sold at a later date.

Paulson said that with the broader economy now under threat, it was essential to move beyond the case-by-case approach followed in the takeover of Fannie Mae and Freddie Mac and the bailout of insurer AIG.

“We saw market turmoil reach a new level last week, and spill over into the rest of the economy,” Paulson said. “We must now take further, decisive action to fundamentally and comprehensively address the root cause of this turmoil.”

Analysts said it appeared Paulson and Bernanke were trying to head off opposition to the bailout plan in Congress by stressing the dire consequences of failing to move quickly.

“The policy war on the financial crisis is as much about the psychological impact as about real intervention. It’s no surprise, therefore, that the engineers behind the bank remedy plan are calling for fast implementation”, said Lena Komileva, G7 market economist at Tullet Prebon in London.

But Matt McCall, president of Penn Financial Group in Ridgewood, N.J., said markets might be further unsettled by Bernanke’s warning.

“I think it’s probably just more of a ploy to put some pressure on Congress but I don’t think he should be speaking like that unless he felt that way because that’s obviously going to put pressure on the stock market,” McCall said.

Paulson said there was “bipartisan consensus” for a quick legislative solution to the crisis but he urged Congress to “avoid slowing it down with other provisions that are unrelated or don’t have broad support.”

However, he and Bernanke provided few clues as to how they view separate add-on provisions suggested by individual lawmakers.

Congressional Democrats want to add assistance for homeowners, curb executive pay at companies that use the program to unload toxic assets, and have the government take equity stakes in such firms. Stocks tumbled on Monday amid prospects that the debate could drag into next week and worries that the plan may not be enough to revive the economy.

U.S. House of Representatives Speaker Nancy Pelosi said on Monday the legislation would pass soon, but “we are not sending a blank check to Wall Street”.

The Treasury also has signaled its opposition to taking equity stakes in financial institutions as part of the plan.


Paulson acknowledged broader reforms of the financial regulatory system are needed, including strong measures to deal with “flaws and excesses”, but said that can wait for another day.

“We must have that critical debate, but we must get through this period first,” he said.

Bernanke said that market stress was worsening and said that heightened the urgency of getting a bailout plan in place.

“If financial conditions fail to improve for a protracted period, the implications for the broader economy could be quite adverse,” he said, adding a broader debate on regulatory overhaul can wait.

“At this juncture, in light of the fast-moving developments, it is essential to deal with the crisis at hand,” Bernanke said. “Development of a comprehensive proposal for reform would require careful and extensive analysis that would be difficult to compress,” he added.

The chief regulator for Fannie Mae and Freddie Mac, Federal Housing Finance Agency director James Lockhart, took a dig at lawmakers by suggesting the government was forced to take over the mortgage finance companies earlier this month because of their delay in putting stronger supervisory powers in place for the companies.

“I am very grateful that Congress granted those authorities to FHFA, but regrettably they arrived too late to establish a strong capital regime in advance of this credit cycle,” Lockhart said.

Additional reporting by Mark Felsenthal, Patrick Rucker and David Lawder, Editing by Chizu Nomiyama

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