Candidates Weigh In On Bailout Proposal

Republican presidential hopeful John McCain and Democrat Barack Obama held news conferences Tuesday to respond to the White House rescue plan for Wall Street. They also answered questions about how the $700 billion package might affect the initiatives they've campaigned on.

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It's Morning Edition from NPR News. I'm Steve Inskeep.

LINDA WERTHEIMER, host:

And I'm Linda Wertheimer. America's next president will have to live with the consequences of whatever rescue is extended to the nation's financial system. The two men who want the job are offering some suggestions about how that rescue might be structured. NPR's Scott Horsley reports.

SCOTT HORSLEY: Republican presidential hopeful John McCain says the Wall Street rescue plan floated by the Bush administration is a burden costing $10,000 for every American family. But expensive as the proposal is, McCain says Congress has no choice but to act.

Senator JOHN MCCAIN (Republican, Arizona; Republican Presidential Nominee): If we don't, credit will dry up with devastating consequences for our economy, people will no longer be able to buy homes, and their life savings will be at stake.

HORSLEY: At a news conference in Michigan yesterday, McCain suggested a number of changes to the rescue plan put forward by the White House, starting with increased accountability.

Senator MCCAIN: We won't solve a problem caused by poor oversight with a plan that has no oversight.

HORSLEY: McCain suggested a bipartisan panel to monitor the Treasury secretary as he buys troubled assets. McCain also called for a $400,000 cap on the salaries of Wall Street executives who unload those assets. He says no company that accepts government help should pay its CEO more than the president of the United States.

Senator MCCAIN: It's wrong to ask teachers, farmers, small business owners to fill the gas tanks of the helicopters of Wall Street tycoons.

HORLEY: Democratic presidential nominee Barack Obama proposed similar conditions during a news conference in Florida. Like McCain, Obama supports bipartisan oversight and limits on CEO pay. He also says taxpayers who finance the rescue plan should be treated like investors with a chance to make their money back.

Senator BARACK OBAMA (Democrat, Illinois; Democratic Presidential Nominee): We can ask taxpayers to make an investment in the stability of our economy, but we cannot ask them to hand their money over to Wall Street without some expectation of being made whole.

HORSLEY: So far, the two candidates are pretty much in agreement, but Obama adds one more requirement that McCain does not. The Illinois senator says any rescue plan for Wall Street should also include help for families who are struggling to make their monthly mortgage payments.

Senator OBAMA: This is not simply a question of looking out for homeowners. It's doubtful that the economy as a whole can recover without the restoration of our housing sector.

HORSLEY: The Bush administration has resisted adding mortgage relief to the rescue package, but Obama insists this is not a case where the president can say my way or the highway.

Senator OBAMA: If we don't get this right then not only are we going to have some immediate problems, but the next administration is not going to have the resources or the capacity to deal with other emergencies that may come up. And so it's critical from my perspective to make sure that this is done properly.

HORSLEY: Both candidates were asked if the 12-figure cost of the rescue might force them to scrap some of the initiatives they've campaigned on. Both said no. McCain is sticking with his plan to extend President Bush's tax cuts and to reduce the income tax rate for corporations.

Senator MCCAIN: The way out of this is to grow our economy. Cut spending, keep taxes low, make sure that there are incentives in place for jobs and businesses to grow and flourish.

HORSLEY: Obama admits he'll have to take economic conditions into account, but insists he won't abandon his big ticket plans for health care, alternative energy, or a middle-class tax cut.

Senator OBAMA: We are going to have to make sure that ordinary folks have money in their pockets, that they are able to pay gas and food costs, that retail sales are bolstered. And so I think that it is important for us to make sure that we are shoring up the economy.

HORSLEY: Both candidates say they plan to stay personally involved in the rescue talks even as they're busy campaigning for a job that just got even harder. Scott Horsley, NPR News.

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Why Congress Objects To The Bailout Plan

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Chris Dodd and Richard Shelby listen to Henry Paulson and Ben Bernanke i

Senate Banking Committee Chairman Christopher Dodd (D-CT, left) and ranking Republican Sen. Richard Shelby (AL) were among the many lawmakers who raised objections to the bailout plan during testimony Tuesday from Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke. Chip Somodevilla/Getty Images hide caption

itoggle caption Chip Somodevilla/Getty Images
Chris Dodd and Richard Shelby listen to Henry Paulson and Ben Bernanke

Senate Banking Committee Chairman Christopher Dodd (D-CT, left) and ranking Republican Sen. Richard Shelby (AL) were among the many lawmakers who raised objections to the bailout plan during testimony Tuesday from Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke.

Chip Somodevilla/Getty Images

The outrage was palpable Tuesday as the Senate Banking Committee grilled Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke on the details of their $700 billion plan to bail out Wall Street with taxpayer funds. But lawmakers are hardly the only ones questioning whether the plan will work. Here's a look at some of the objections being raised on and off Capitol Hill.

It's A Huge Amount Of Power To Invest In The Treasury: The Bush administration's plan would grant the Treasury secretary nearly absolute control of the $700 billion authorized by the bailout measure. The language in the measure sent to Congress would make the Treasury secretary's decisions "non-reviewable" — including by "any court of law or any administrative agency." That would give the Treasury secretary powers that are not only extraordinary but, some would say, also unconstitutional because of the lack of accountability.

Jon Macey, a professor and deputy dean of Yale Law School, says the bill contains the largest transfer of power from Congress to the administration that he has ever seen. Macey says Congress is handing over more power than it did in granting the executive branch leeway in the Patriot Act, and more powers than when authorizing combat through the war powers clause. He says the move amounts to a sidelining of Congress.

Senate Banking Committee Chairman Christopher Dodd, a Democrat from Connecticut, on Tuesday called the language in the plan "so troubling" and said it "cannot last" as part of the legislation.

It Represents A Fundamental Shift In The Way The U.S. Economy Works: The Bush administration's plan to bail out the nation's financial institutions represents an unprecedented intervention in free markets. If the Wall Street bailout is adopted, Republican Sen. Jim Bunning of Kentucky said last week, "the free market for all intents and purposes is dead in America."

A fundamental principle of free-market capitalism is that investors take on big risks to reap big rewards — but they also assume any losses that occur. The government's plan would radically alter that model, leaving profits private while making losses public.

It's Not The Only Viable Option For Fixing This Mess: In a nutshell, the Bush administration's plan would authorize up to $700 billion to let Treasury buy up bad mortgages from financial institutions. With these toxic assets off the books for firms, lenders would once again be willing to lend and the money would start flowing freely through the markets, the theory goes. Objections to the plan have come from both sides of the aisle — and from academics and economists who say it amounts to a huge handout to Wall Street without necessarily fixing the problem.

Many economists have proposed alternatives and alterations to the administration's proposal, some of which have been taken up by lawmakers. Details of the plan are still being negotiated, but here are some of the key points of contention:

Equity stakes: Rather than simply buying up bad loans and letting taxpayers assume all the risk, why not take shares in the financial firms in exchange, so that taxpayers could also participate in any potential profits? Banking Committee Chairman Dodd has proposed "contingency shares" that would only be issued if losses are realized on the assets bought up from a firm. In Tuesday's hearing, Paulson rejected the idea of equity shares, saying it would make the bailout program "ineffective" — though he didn't offer details on why that would be the case.

Valuing assets: There are already buyers for these toxic assets out there — they just aren't willing to buy them at prices that financial institutions find palatable. (In some cases, selling at those prices would make firms insolvent.) Many critics argue that the fundamental problem is that the financial markets lack capital, so the only way the government's plan will work is if the Treasury overpays for the assets; otherwise, why not just let investors buy them up?

So, how to price these assets? Technically, assets are only worth what a buyer is willing to pay for them. If no one wants to buy mortgage-backed securities, then right now they are worthless — but that doesn't mean they will always be worthless. Paulson has suggested that one way to set prices would be through what's known as a reverse auction, the goal of which is to drive prices down, rather than up.

But some economists note that reverse auctions work best when the assets being auctioned off are essentially identical. That's not the case with mortgage-backed securities: Some of them may have plenty of healthy, payment-producing mortgages in them, while others may be full of defaulted loans. If the government simply buys the securities with the lowest price, it may end up with $700 billion worth of the worst loans, critics say.

Executive-pay limits: Some lawmakers want any company that participates in the bailout to agree to slash the pay of its executives. After all, they say, those who created the mortgage mess shouldn't be allowed to profit from the bailout. But Paulson has resisted this idea. He argues that pay cuts would discourage firms from using the program and would force thousands of firms to review their executive compensation before participating, a time-consuming process.

Lawmakers Are Being Urged To Act While Staring At The Barrel Of A Gun: Congress is being asked to enact a fundamental restructuring of the U.S. economy — in one week. That's not a lot of time for lawmakers to weigh their options and the repercussions of their actions. In private meetings on the Hill, Paulson and Bernanke have warned lawmakers about the dire consequences of not acting — but these economic Doomsday scenarios have not been spelled out to the public.

Democratic Sen. Jon Tester of Montana told Paulson as much on Tuesday: "I fully feel the urgency ... But the truth is that we have to be given the time to do this right, or it's not going to work and we'll be back here next year or in two years asking for another $700 billion or more."

With additional reporting by Laura Conaway and Adam Davidson.

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