Bernanke warns Congress must approve bailout

Reuters
September 24, 2008

Congress must approve a $700-billion US financial bailout or see the lifeblood squeezed from the world's richest economy, the U.S. central bank chief warned Wednesday, as the crisis overran the presidential campaign.

Bush administration officials warned of a looming economic disaster akin to the Great Depression of the 1930s if an angry and rancorous Congress failed to act swiftly to fund a bailout that would be larger than the total cost of the Iraq war.

The president will seek to convince the American public to support the plan in a televised address Wednesday night.

Republican presidential candidate Senator John McCain said he will break off from his campaign to return to Washington to help broker a deal, saying he feared legislation could not pass in its current form.

Democratic candidate Senator Barack Obama's campaign said the two senators had spoken Wednesday and would issue a joint statement calling on Congress to act.

While investors see an 80-percent chance that the Congress will approve the bailout by the end of the month, according to Intrade, an online betting market, many lawmakers are demanding changes to the bailout plan.

The changes include more protections for taxpayers and restrictions on the pay of executive at companies that unload their bad assets.

That uncertainty has roiled markets.

"There's a tremendous amount of anxiety whether this [bailout] bill will get passed," said Thomas di Galoma, head of U.S. government bonds at Jefferies & Co. in New York.

As Federal Reserve chairman Ben Bernanke toiled to convince Congress to approve the hugely expensive plan allowing the government to buy up toxic mortgages that have dried up global credit, financial markets showed extreme strain.
   
Investors stampeded into cash, briefly pushing one-month interest rates to below zero on fears that lawmakers might delay or change the nature of the bailout. Scarce credit forced overnight lending rates for companies to 6.50 percent.

The U.S. dollar fell against the euro and global stocks seesawed as unease over the rescue plan -- which could cost every man, woman and child in America $2,300 -- kept investors on edge.
   
Treasury Secretary Henry Paulson, himself a former Goldman Sachs boss who built his $700-million fortune on Wall Street, tried to downplay the cost of the rescue.

"[This] is not a spending program," he told lawmakers. "It is an asset purchase program, and the assets which are bought and held will ultimately be resold with the proceeds coming back to the government."

Wrangling over the bailout overshadowed news that Warren Buffett's Berkshire Hathaway Inc. will invest $5 billion in embattled banking titan Goldman Sachs Group Inc., which is transforming itself from an investment bank into a traditional bank holding company to shield from the crisis. Goldman's shares rose 4 percent.

"I am to some effect betting on the fact that the government will do the rational thing and act properly," Buffett, one of the world's richest men and pre-eminent investors, told CNBC television.

But he added markets remained in a "dangerous situation."

In the second day of congressional hearings, Rep. Baron Hill, a Democrat from Indiana, told Bernanke, "There is great angst in Congress over whether we should do this," and asked how to explain the need for an expense greater than the cost of the Iraq war since 2003 to regular Americans.

Bernanke bluntly warned, "Choking up of credit is like taking the lifeblood away from the economy."

"The economy will not function in a healthy way without the availability of credit," he said.

Asked if the crisis would match the Great Depression of the 1930s, Bernanke said, "I think this is the most significant financial crisis of the postwar period of the United States, and has in fact a global reach."

As U.S. lawmakers mull the size and content of the bailout, the FBI said it is investigating potential mortgage fraud involving firms and senior executives at the heart of the financial crisis.

The FBI is investigating Fannie Mae, Freddie Mac, Lehman and AIG, expanding its inquiry into corporate mortgage fraud, law enforcement officials said Wednesday.

View all stories   |   View all clips