Bailout proposal sent to Congress seeks authorization to spend as much as $700 billion to buy troubled mortgage-related assets.
NEW YORK (CNNMoney.com) — President Bush has asked Congress for the authority to spend as much as $700 billion to purchase troubled mortgage assets and contain the financial crisis.
The legislative proposal – the centerpiece of what would be the most sweeping economic intervention by the government since the Great Depression – was sent by the White House overnight to lawmakers.
President Bush said Saturday that the plan matches the scope of the problem.
“It is a big package because it’s a big problem,” he told reporters at a joint news conference with Alvaro Uribe, the president of Colombia.
“The risk of doing nothing far outweighs the risk of the package,” Bush said.
Treasury Secretary Henry Paulson, lawmakers and their aides are expected to work through the weekend in an effort to craft a bill swiftly. Democratic leaders on Capitol Hill said they expect the bill to go before a vote within days.
Paulson, Federal Reserve Chairman Ben Bernanke and other officials have said in recent days that the lack of easy credit between banks and other financial institutions threatens to inflict serious damage on the economy if not addressed immediately.
The plan would allow the Treasury to buy up mortgage-related assets.
The aim is for the government to buy the securities at a discount, hold onto them and then sell them for a profit.
The Bush administration sent its proposal to members of Congress overnight, according to White House spokesman Tony Fratto.
“Secretary Paulson and his team will continue their discussions with Congress and staff throughout the weekend, and we’re hopeful that good progress will be made,” Fratto said.
The mortgage plan is part of an extraordinary effort by the federal government to contain a financial crisis that has forced a major realignment on Wall Street and has started rippling out to Main Street.
In the past week, two of the nation’s most venerable investment banks – Lehman Brothers (LEH, Fortune 500) and Merrill Lynch (MER, Fortune 500) – have fallen and the Federal Reserve was forced to lend $85 billion to prevent the sudden collapse of insurance giant American International Group (AIG, Fortune 500).
Meanwhile, mainstay financial institutions are scrambling to raise cash and shore up their books as lending has frozen up and investor confidence has sunk.
The cost to taxpayers?
The cost of the program to taxpayers may hinge on the price at which the Treasury buys the mortgage securities.
“The government could make a profit, a substantial profit,” said Jaret Seiberg, a financial services analyst at the Stanford Group, a policy research firm. “The pricing mechanism is going to be central.”
The jury is still out on whether the proposal will fix the financial crisis, although experts are cautiously optimistic the plan will help the housing crisis. It will help banks shore up their balance sheets by removing hard-to-value assets. This would address the seemingly endless rounds of writedowns and capital raising that have been rocking the financial sector.
Without these bad loans weighing on their books, banks may be more willing to lend. Or at least that’s the goal.
The problem is that the bailout will not automatically make banks profitable, nor will it stop the slide in home values that is wreaking havoc on the economy.
By Jeanne Sahadi, CNNMoney.com senior writer
Last Updated: September 20, 2008: 11:18 AM EDT