Bush presents $700b bailout plan

The Bush administration on Saturday sent a $700 billion financial markets rescue plan to Congress where Democrats immediately questioned its impact not only on Wall Street, but on homeowners and taxpayers as well.

The plan to move toxic mortgage-related debt off the balance sheets of U.S. banks and other institutions, and into a massive government portfolio, represents an all-out attack on the worst financial crisis since the Great Depression.

Under authority sought by the U.S. Treasury Department, the government could purchase as much as $700 billion in mortgage-related assets, but only from U.S.-headquartered institutions.

Treasury secretary Henry Paulson Jr. would be granted sweeping powers, and his decisions related to the buyback program could not be reviewed by any court, according to a copy of the department's draft legislation.

In a related move, the U.S. government's debt limit would be raised to $11.315 trillion from $10.615 trillion.

Congressional leaders have promised swift action on the bailout package but many details are still to be worked out. New York Democratic Sen. Charles Schumer, chairman of Congress' Joint Economic Committee, said the plan is a good start. "But it includes no visible protection for taxpayers or homeowners. We look forward to talking to Treasury to see what, if anything, they have in mind in these two areas," he said.

As lawmakers' aides huddled on Capitol Hill, President George W. Bush acknowledged the plan would put large amounts of taxpayer money on the line to buttress shaky markets. "But I'm convinced that this bold approach will cost American families far less than the alternative," he said in his weekly radio address.

"Further stress on our financial markets would cause massive job losses, devastate retirement accounts, further erode housing values, and dry up new loans for homes, cars and college tuitions."

After government takeovers of individual firms in recent months failed to stop spreading credit turmoil, U.S. authorities are turning their focus to part of the underlying problem - the rising tide of bad mortgage debt choking the financial system.

The draft legislation said Treasury could hire asset managers to handle debt purchases, which could include residential or commercial mortgages and related instruments that were originated or issued on or before Sept. 17, 2008.

The authority to purchase ends two years from date of enactment, but the authority to hold the assets would continue.

Banking industry sources said "reverse auctions" would be held to purchase $50 billion tranches of debt, which could include residential and commercial mortgages and mortgage-backed securities. But that level of detail was not spelled out in the draft legislation.

A Treasury official said Friday that hedge funds would not be eligible to offload troubled assets under the plan, but that was not explicit in the draft legislation.

Congressional committees were briefed yesterday on the legislation, which could be considered by the House of Representatives and Senate as early as next week. Democrats have said they might try to use the financial bailout legislation to reduce home foreclosures and put some limits on the pay of corporate chief executives. "We must not forget Main Street as we work to address the crisis on Wall Street," Senate Majority Leader Harry Reid, a Nevada Democrat, said on Friday.

The financial crisis has dominated the U.S. presidential campaign this week with Senators John McCain and Barack Obama skirmishing over the proper government role. And some members of Bush's Republican Party are upset with the government's increasing involvement in the private sector.

"The free market for all intents and purposes is dead in America," said Kentucky Sen. Jim Bunning. The Treasury proposal would "take away the free market and institute socialism in America," he said in a statement on Friday.

But financial markets have shown their approval and may be disappointed if Congress does not swiftly back the measures. The Treasury and Federal Reserve have already put nearly $1 trillion of taxpayer money on the line to help credit flows. And banks worldwide have suffered more than $500 billion of write-downs and loan losses since the global credit crisis began more than a year ago.

The plan to buy back mortgage-related debt was just one of a series of measures unveiled in the last two days as the treasury and Fed decided the frozen credit markets signaled a growing storm that would engulf the economy.

The treasury said on Friday 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 last week.