Debate Begins on Government’s $700 billion Bank Bailout

Congress debated today over the Bush Administration’s proposed $700 billion financial rescue package designed to shore up the mortgage market and financial services companies.

In a related development, Morgan Stanley and Goldman Sachs announced they would be converting from investment banks – the model they’ve operated under for the last 20 years – to more conventional bank holding companies. The moves by Morgan and Goldman were made in the wake of the failures of Bear Sterns and Lehman Brothers and the near failure of AIG as well as the merger of Merrill Lynch and Bank of America.

The Bush Administration pushed for quick approval of the financial rescue package. “Failure to act would have broad consequences far beyond Wall Street,” President Bush said in a prepared statement. “It would threaten small business owners and homeowners on Main Street.”

But Democrats were pushing for more protections for homeowners and taxpayers.

“The Administration's $700 billion proposal does not include the necessary safeguards.  Democrats believe a responsible solution should include independent oversight, protections for homeowners and constraints on excessive executive compensation,” House Speaker Nancy Pelosi (D-Calif.) said in a prepared statement. “We will not simply hand over a $700 billion blank check to Wall Street and hope for a better outcome.  Democrats will act responsibly to insulate Main Street from Wall Street.”

Pelosi added: "As we proceed to deal with this crisis, this is clear recognition that the party is over for the Bush Administration's anything goes, failed economic policies that have damaged our economy, undermined the middle class and further pointed out the need for a new direction."

Among the highlights of the proposed legislation:

• The Administration would work with Congress to pass legislation approving the Federal government's purchase of difficult–to-sell assets, such as troubled mortgages, from banks and other financial institutions.
• Money market funds could opt in and pay a fee to participate in an insurance fund that would compensate investors in the unlikely event that a money market fund must liquidate.
• The Federal Reserve would also taking steps to provide additional liquidity to money market mutual funds.

As details emerged on the plan, Wall Street took a hard look at the consequences. Many investors were skeptical, sending the stock market lower by more than 200 points in early trading Monday after last week's roller coaster ride on the exchange.