The Bush administration's plan for a $700bn bailout of financial markets was savaged by lawmakers on Capitol Hill, who demanded more time to consider the potential costs to the taxpayer and said they would insist on additional measures to punish Wall Street for excesses that have taken the economy to the edge of disaster.
In a piece of political theatre more closely followed by the world's financial markets than any in memory, lawmakers demanded more details of which firms would benefit, called for extra help for the American homeowners at the sharp end of the credit crisis, and suggested that bank executives accept a cap on their pay in return for the government help.
Ben Bernanke and Henry Paulson, the college professor and the Wall Street boss who have found themselves fighting to save the world financial system, went to Capitol Hill yesterday to try to sell a plan launched at the height of the financial panic last week with high hopes of cross-party support.
But at the hearing in front of the Senate banking committee, lawmakers passed on the furious reaction of their constituents, who see an unprecedented sum of taxpayer money being used to rescue banks brought low by their ill-advised investments in toxic mortgage derivatives.
Mr Paulson, who left Goldman Sachs to become Treasury Secretary two years ago, said that thousands of banks and other financial institutions – including foreign firms – would be eligible to sell those derivatives to the US government, in an effort to get the credit markets moving again.
And Mr Bernanke, who has been chairman of the Federal Reserve since 2006, said that the government's unprecedented intervention might ultimately be relatively modest, if it encourages other investors to finally start buying the toxic assets that are currently impossible to value.
Members of the Senate banking committee nonetheless lashed out at Mr Paulson for presenting them with an open-ended plan, short on detail, which would hand him extraordinary powers to spend taxpayer money with little Congressional oversight and fewer restraints on how the cash is used.
Jim Bunning, a Republican Senator, said the plan would "take Wall Street's pain and spread it to the taxpayers". And Richard Shelby, the most senior Republican on the committee, said Congress probably wouldn't solve this crisis by "spending a massive amount of money on bad securities". Chris Dodd, the Democrat chairman, said the plan was "unacceptable" in its current form.
A grim-faced Mr Paulson agreed that the blame lay with excesses on Wall Street and the failure of regulators, but that his $700bn bailout plan was better than letting financial markets fail. "You're angry and I'm angry that taxpayers are on the hook. But guess what, they are already on the hook for the system we all let happen," he said. "If the system doesn't work the way it needs to work, people aren't going to get the loans they need."
Mr Bernanke, one of the world's foremost scholars on the causes of the Great Depression in the 1930s, said jobs would be lost and economic growth would shrivel if there is no end to the crisis on Wall Street. The losses on mortgage derivatives, which have now passed $500bn (£270bn), have already caused financial institutions to shrink their activities and made it difficult for people to get mortgages. An all-out panic could cut off funding to business throughout the economy, he said.
"I'm a college professor," he told lawmakers. "I was criticised for taking this job without having worked on Wall Street. I have no interest or connections on Wall Street. My interest is solely for the strength and recovery of the US economy."
With the political wrangling set to continue, credit markets showed more strain yesterday. Cash was flowing back into money market funds, the epicentre of last week's panic, but Libor, the London inter-bank interest rate which falls when banks show more willingness to lend to each other, was slightly higher.
And the first corporate bond issue for two weeks, by the construction equipment group Caterpillar, showed the increased costs that the crisis is now piling on to businesses. It raised $1.3bn to fund its day-to-day operations, and had to pay interest rates 3.2 per cent and 3.25 per cent above the rate on US Treasuries. That compares to premia of 1.75 per cent and 2.05 per cent last time it issued similar bonds.
Mr Paulson refused to say exactly what assets the government will buy. He suggested the money would be spent in tranches, using different pricing mechanisms for different types of assets. The aim, Mr Bernanke said, was to find a value that reflected how much money the holders of the underlying mortgages and other loans would ultimately pay back. The taxpayer might ultimately make a profit.
The United Nations General Assembly also addressed the financial crisis yesterday. French President Nicolas Sarkozy called for a summit of world leaders. "We have retreated too long when faced with the need to give the world the institutions that will regulate it," he said. "Let us build a regulated capitalism in which whole swathes of financial activity are not left to the sole judgment of market operators."
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