HANK Paulson, the US Treasury Secretary, made the rounds of television studios yesterday to keep up political pressure for a $700bn (£382bn) bailout of Wall Street, a plan that would effectively turn the federal government into the world's biggest hedge fund and himself into its biggest hedge fund manager.
The Treasury has published bare-bones legislation that allows it to buy up the mortgage-related assets that have been at the heart of the credit crisis, the most sweeping intervention in financial markets since the Great Depression.
Just three pages long, it gives wide latitude to the Government and the Treasury Secretary in particular to trade these illiquid derivatives as he sees fit.
Details of the plan will be worked out on the hoof, but it is imperative to pass the legislation within days, Mr Paulson said – and he warned Democrats in Congress not to complicate matters by trying to add extra provisions to the bill.
The plan was conceived only last Thursday after several days of terrifying events in the credit markets, including the collapse of a series of powerful financial firms and a run on money market funds that threatened to turn off the funding taps to businesses across the US.
"It pains me tremendously to have the American taxpayer put in this position but it is better than the alternative," Mr Paulson said yesterday.
Under the Treasury plan, the Government will have permission to use up to $700bn of US taxpayer money to buy mortgage-related assets, whose collapse in value has destabilised investment banks and other financial institutions that hold them. It jacks up the limit on the US national debt to $11.3trl to allow for the extra spending, the second increase in the past two months after Mr Paulson earlier won more room to use Government funds to bail out Fannie Mae and Freddie Mac, the tottering mortgage giants.
The Treasury and Mr Paulson, who ran the investment bank Goldman Sachs until joining the Bush administration in 2006, will be exempt from lawsuits under the plan, and will have to report to Congress just four times over the two-year life of the scheme. "We need this to be clean and to be quick," Mr Paulson said in an interview on ABC television's This Week, warning that delays could imperil the US economy.
Democrats in Congress were huddled over the weekend to form plans that would insert additional provisions into the bill. In particular, they were considering pushing for an economic stimulus package, to inject $50bn into the economy through public works projects and an increase in unemployment benefits. Another Democrat hope is for a change to the bankruptcy laws to allow judges to modify mortgage terms, so people brought to the financial brink can stay in their homes.
Barney Frank, chairman of the House Financial Services Committee, wanted caps on chief executive pay at the banks that sought to unload toxic assets on to the US taxpayer.
Congress is scheduled to break for the elections by Friday, and its leaders are aiming to have a rescue package approved by then.
The notion that the US Government would ultimately have to take toxic mortgage assets from the private sector on to its own books has been common since almost the beginning of the credit crisis last year, but politicians were stung into action last week, when Lehman Brothers collapsed, the insurance AIG had to be nationalised and panic gripped financial markets, disrupting the flow of credit even to sound businesses.
The unprecedented Government interventions have caused dismay on the Republican right.
"The free market for all intents and purposes is dead in America," Kentucky Senator Jim Bunning of Kentucky declared on Friday.
The questions to be answered
*What will the treasury buy?
The Treasury has wide latitude to decide what exactly gets purchased, as long as it is an investment that existed as of last Wednesday. Its legislation defines "mortgage-related assets" as residential and commercial mortgages themselves, mortgage-backed securities, collateralised debt obligations.
*At what price?
Prices will be determined "through market mechanisms where possible". A reverse auction process has been mooted, where the Treasury would suggest one price and banks could bid the price lower in order to rid themselves of these troublesome assets.
*Who will manage the assets?
Mr Paulson apparently intends to hire private sector fund managers to look after the portfolio. Brainstorming ideas over the weekend, officials suggested splitting the $700bn into pots of $50bn.
*How long for?
The legislation allows the Treasury to buy assets for the next two years, but it could be husbanding them for much longer if it decides holding them to maturity will minimise the losses to the US taxpayer.
*
Who can sell assets?
There is an instinctive distaste for using US taxpayer's money to bail out anything but US firms. But Mr Paulson has hinted he could be flexible since foreign banks clogged with toxic assets are also destabilising the US financial system.
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