WASHINGTON — The Federal Reserve took another big step late Sunday to reshape Wall Street and end the era of goliath investment banks, even as Congressional Democrats worked to put their imprint on the Treasury Department's unprecedented $700-billion plan to shore up the economy.
The Fed gave the green light for the two remaining major investment banks -- Goldman Sachs Group Inc. and Morgan Stanley -- to become bank holding companies that can create commercial banks to take federally insured deposits, make an array of loans and otherwise act like any other bank.
The change subjects the two companies, which already had limited banking powers, to much stricter federal regulation. But that may save them from the vagaries of Wall Street, and the risk that they could fall victim to the credit squeeze that has claimed two of their major rivals since March.
The new line of inexpensive funding -- bank deposits -- and lending powers could help the firms gain the stability and flexibility that have helped other major banking companies, such as JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co., withstand the turmoil in the financial system this year.
The banking charter also gives the companies permanent access to the Fed's borrowing window, a privilege the central bank opened to investment banks in March, but only temporarily.
Meantime, Democrats were busy rolling out some of the details on changes they want to make in Treasury's bailout plan, seeking to ensure that Main Street, not just Wall Street, receives help. Their moves set the stage for tough bargaining this week with the White House in the heat of a political campaign.
As Treasury Secretary Henry Paulson hopscotched the Sunday talk shows urging lawmakers to move swiftly, Democrats said they would push for changes that include increasing aid for homeowners at risk of foreclosure, limiting executive compensation at companies that benefit from the bailout and establishing tough oversight of the rescue plan.
"I won't support a program that signs a $700-billion check and says 'Come back someday when you've resolved the issue,' " Sen. Christopher Dodd (D-Conn.), chairman of the Senate Banking Committee, told reporters Sunday afternoon. "We all want to get this job done, but we want to get it done right."
Appearing on four of the five Sunday shows, Paulson repeatedly portrayed the plan as necessary to stave off one of the nation's worst economic calamities, but he is facing a tough job of selling it to some members of President Bush's own Republican Party who are concerned about its staggering cost to taxpayers, as well as perceptions that it favors financial institutions over ordinary Americans.
"This is the mother of all bailouts," Sen. Richard Shelby of Alabama, the top Republican on the Senate Banking Committee, said on CBS' "Face the Nation."
Rep. Barney Frank (D-Mass.), appearing on the same program, added: "It's kind of hard to tell the average American that we're going to continue to have foreclosures that destabilize neighborhoods and deprive cities of revenues they need, but we're going to buy up the bad paper."
But Paulson said that the plan would benefit everyone because of the significant ripple effects that occur when companies cannot borrow money. "It pains me tremendously to have the American taxpayer be put in this position, but it's better than the alternative," he told NBC's "Meet the Press."
The plan would give the Treasury secretary broad authority to buy the troubled mortgage-related assets of financial institutions in order to stabilize financial markets, and he predicted that the "ultimate cost" to taxpayers would be far less than the "headline number" of $700 billion. "Those assets will be held and will be sold," Paulson told ABC.
He urged Congress to act this week, before Friday's scheduled recess for the fall campaign.
Frank, chairman of the House Financial Services Committee, sent Paulson a counterproposal Sunday that is expected to be the subject of intense negotiations. According to a copy of the document, it calls for:
* Requiring companies that sell bad assets to the government to meet "standards for executive compensation," including limits "as determined to be appropriate in the public interest in light of the assistance being given to the entity."
* Giving the comptroller general, who heads Congress' investigative arm, the Government Accountability Office, authority to oversee the program.
* Requiring Treasury to use its authority to work to "minimize foreclosures" and work with other federal entities that hold mortgage-related assets to acquire the loans that can be modified and restructured and, "where permissible, to permit bona fide tenants who are current on their rent to remain in their homes under the terms of the lease."