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Federal rescue plan takes shape

Protection for money market funds, curbs on 'short sales' sought

September 20, 2008|Peter G. Gosselin, Maura Reynolds and Richard Simon | Times Staff Writers

WASHINGTON — Federal regulators rolled out the first pieces of their sweeping plan to end the nation's financial crisis Friday, moving to insure up to $2 trillion in money market mutual funds and temporarily barring investors from betting on the decline of financial company stocks.

The moves came as lawmakers awaited the keystone of the new panic-fighting plan -- the proposal for a federal takeover of the troubled mortgage assets that now clog the books of banks and securities firms.

Exactly how the takeover would be accomplished -- and at what potential cost to taxpayers -- is still being worked out inside the Bush administration. Concerns were raised Friday, however, by Republicans anxious about the price tag and by Democrats who fear that the rescue plan would favor highflying financiers over ordinary Americans.

Still, expectations for a comprehensive rescue plan led to a strong rally on Wall Street for a second straight day, with the Dow Jones industrial average posting its biggest back-to-back point gains in more than eight years.

"This is a pivotal moment for America's economy," President Bush said during a brief appearance in the White House Rose Garden. "We must act now to protect our nation's economic health from serious risk. There will be ample opportunity to debate the origins of this problem. Now is the time to solve it."

The chief architects of the latest effort, Treasury Secretary Henry M. Paulson and Federal Reserve Chairman Ben S. Bernanke, gave new hints about the dimensions of their proposal, which would probably be the largest government intervention in the financial markets since the 1930s.

"We're talking hundreds of billions," Paulson told a morning news conference. "This needs to be big enough to make a real difference and get at the heart of the problem."

The two men spent much of their day on the phone pleading for speedy action by Congress on their "bad asset" plan, and lawmakers who spoke with them said the pair presented a sobering picture of just how fragile financial markets have become.

"All of us are prepared to do whatever we can this weekend . . . to fashion a proposal that will get us out of this mess," said Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee, who was expected to shepherd the plan through the Senate. "We understand the gravity of the moment."

Beneath the surface, however, questions about the administration's approach began to be voiced among members of Congress, as well as outside analysts. And, with the Nov. 4 presidential election only weeks away, political tensions inevitably arose as well.

On Capitol Hill, conservative Republicans denounced the administration's move away from free-market principles.

"At this point, Congress is being asked to support an uncertain entity, costing an uncertain amount of dollars, for an uncertain duration -- a decision that will have implications for generations to come and requires absolute certainty," said Rep. Jeb Hensarling (R-Texas), a leader of House conservatives.

"My fear is that taxpayers will be left with the mother of all debts."

Meanwhile, Democrats complained that the White House was offering too much help to financial companies that bet big on risky mortgage investments, and not enough to people losing their homes to foreclosure.

They expressed special irritation with what they described as Paulson's insistence that Congress approve the administration proposal "clean," without any aid for troubled homeowners or regulations aimed at preventing a repeat of the current disaster.

"It's got to be done right away, but they won't make any concessions in order to get it to happen," said Rep. Brad Sherman (D-Sherman Oaks), who sits on the House Financial Services Committee.

"They are playing Russian roulette in the hopes that if the economy gets shot, the Democrats get blamed," Sherman said.

Even policy analysts who are generally not averse to government intervention in the economy seemed taken aback by the apparent scale and aggressiveness of what the administration and the Fed have in mind. Robert E. Litan, an ex-Clinton administration Treasury official who is now a senior analyst with the Brookings Institution, said the new plan seemed to invite banks and securities firms to dump their very worst assets on the government with no clear way for Washington to get rid of them.

"What they're going to get is the financial equivalent of radioactive waste," he warned.

Earlier in the week, the Dow Jones industrial average fell to its lowest level in almost three years as giant financial institutions teetered on the verge of collapse and global credit markets seized up as banks hoarded their cash.

Financial markets began recovering Thursday, when federal officials expressed support for a comprehensive plan to defuse the crisis.

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