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Government 'must act now', says Bush

Latest update : 2008-09-20

President George W. Bush pledged on Friday that the US government was acting to save the economy in the worst crisis since the Great Depression, warning taxpayers they would bear the brunt of the cost.

Also read: European stocks jump back up after US intervention  



WASHINGTON - The United States surged into action on Friday to launch an all-out attack against the worst financial crisis since the Great Depression, readying a plan to tap hundreds of billions of dollars in taxpayer funds to buy up toxic mortgage-related debt.


Capping a week that has reshaped Wall Street, U.S. Treasury Secretary Henry Paulson urged Congress to quickly agree on a program for huge purchases of bad debts held by banks and other financial institutions. Lawmakers promised fast action.


Losses on these debts have choked the financial system, forced lenders into bankruptcy and led the economy to what U.S. President George W. Bush called a "pivotal" moment.


"America's economy is facing unprecedented challenges, and we are responding with unprecedented action," Bush told reporters in the White House Rose Garden.


After having taken a series of other emergency steps that failed to erect a firewall against the spreading credit turmoil, U.S. authorities turned their attention to the underlying problem -- the rising tide of bad mortgage debt.


Paulson offered few details on Treasury's evolving plan but said he would work through the weekend and next week with Congress to get a program put in place. Congressional aides said they expected to see more details within 24 hours.


Rep. Steny Hoyer, the Democratic leader in the House of Representatives, said the chamber would likely take up a bill to implement the plan early next week. House Speaker Nancy Pelosi said lawmakers would stay in town past their hoped-for adjournment next Friday if needed to pass it.


"We must now take further, decisive action to fundamentally and comprehensively address the root cause of our financial system's stresses," Paulson said at a news conference. "We're talking hundreds of billions. This needs to be big enough to make a real difference and get at the heart of the problem."


U.S. stocks, which chalked up their best day in six years on Thursday as talk of the more aggressive approach spread, soared again on Friday. The blue chip Dow Jones industrial average .DJI> closed up 368 points, or about 3.4 percent.


The news also caused waves in the U.S. presidential campaign. Republican hopeful Sen. John McCain knocked the Treasury for taking a haphazard approach to the crisis, while rival Democrat, Sen. Barack Obama, supported the latest moves.




Paulson and Federal Reserve Chairman Ben Bernanke have already put close to $1 trillion of taxpayer money on the line to try to keep credit flowing, and the new effort could double that amount.


At a meeting with congressional leaders on Thursday night, Paulson and Bernanke made the case for aggressive action to get ahead of events that could devastate an already weak economy.


"When I heard his description of what might happen to our economy if we failed to act, I gulped," Democratic Sen. Charles Schumer of New York said, referring to Bernanke's appraisal.


A congressional aide on a telephone conference call between the Fed, Treasury and lawmakers on Friday said that Bernanke had warned them "If Congress doesn't act soon, there will be an economic meltdown."


Fed spokeswoman Michelle Smith declined to comment directly on the accuracy of the chairman's reported remark, but confirmed that he painted "a dark scenario".


At his news conference on Friday, Paulson said the latest plan was the best hope of ultimately protecting the public purse and avoiding a grave recession.


"I am convinced that this bold approach will cost American families far less than the alternative -- a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion," he said.


A Treasury official said that hedge funds and non-U.S. financial institutions would not be allowed to offload their troubled assets onto American taxpayers under the plan.


The White House said it was too soon to say how the plan would impact the nation's debt, and said it was possible many of the funds could be recovered as markets stabilize and currently bad assets are sold off.


Paulson told lawmakers on the conference call that the government would get most of the money back in the long run, meaning some level of a loss, the congressional aide said.


Other congressional aides also said that Treasury would make a proposal to Congress within 24 hours to hire asset managers to implement the purchases, and would seek maximum flexibility on the types of assets that could be bought.


One of those aides said the proposal may call for locating the program initially within the Treasury and then possibly migrating it later into an independent entity, as long as that could be done without slowing the market rescue process.


Another congressional aide said the issue of whether the government should receive warrants in companies that are offloading assets is being discussed.


It was still unclear who might be in charge of the program and how much taxpayer money it will likely cost.


Sen. Richard Shelby of Alabama, the top Republican on the U.S. Senate Banking Committee, said on ABC's "Good Morning America" the asset-purchase plan could cost anywhere from $500 billion to $1 trillion.


The plan is reminiscent of the Resolution Trust Corp, a government agency set up to help the nation out of the savings and loan crisis in the 1980s. The RTC, however, took whole institutions under its wing whereas the new fund under discussion would remove bad assets from the balance sheets of financial institutions to help revitalize them.


One financial source briefed on other calls made by the Treasury to Washington lobby groups said that the Treasury feels it has the authority to take on these assets directly, and therefore won't need to set up a so-called RTC2.




The major effort marked the latest dramatic government bid to prevent credit markets from freezing up over huge losses on subprime and other mortgage debt.


These have forced U.S. investment bank Lehman Brothers Holdings Inc into bankruptcy, Merrill Lynch into a hasty marriage with Bank of America , the Fed to bail out troubled insurer American International Group, and the government to seize control of mortgage finance giants Fannie Mae and Freddie Mac .


"The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy," Paulson said.


The Treasury also said on Friday that 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 year-old credit crunch. Money market fund assets dropped by a record $169.03 billion in the week ended Sept. 17 as jittery investors pulled money out.


The Treasury said it would back money market funds whose asset values fall below $1 a share. Separately, the Fed said it would lend money to banks to finance purchases of certain assets from money market funds.


"They are absolutely petrified of ... a run on financial assets," said Boris Schlossberg at GFT Forex in New York.


A panic in money markets set in on Tuesday, when the Reserve Primary Fund, a fund whose assets had tumbled 65 percent in recent weeks, fell below $1 a share in net asset value because of losses on debt issued by Lehman Brothers.


The Treasury also said it would 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 -- a further effort to get credit flowing.

Date created : 2008-09-19