Updated from 11:51 a.m. EDT
Treasury Secretary Henry Paulson and
Chairman Ben Bernanke came to Congress with a resounding message on Tuesday: Pay now, reform later.
But passing their $700 billion proposal to buy troubled assets from financial institutions faces several roadblocks. Lawmakers expressed serious concerns about writing a giant check so hastily, with few restrictions and no guarantees that taxpayer funds will be recouped.
Some legislators were also adamant about inserting provisions in any measure to tighten oversight, better protect homeowners, issue government stock warrants in exchange for relief and bar Wall Street executives from receiving "golden parachute" compensation packages as they exit struggling firms.
However, Bernanke and Paulson suggested such measures would delay passage of the legislation. The consequences of stalling could be dire, they said, inflicting further damage to an already fragile U.S. economy, as well as the global financial markets.
"I believe if the credit markets are not functioning that jobs will be lost, that our credit rate will rise, more houses will be foreclosed upon, GDP will contract, that the economy will just not be able to recover in a normal, healthy way," Bernanke said.
While Bush administration honchos testifying on the Hill --
Securities and Exchange Commission
Chairman Christopher Cox and Jim Lockhardt, head of the Federal Housing Finance Agency, also appeared -- insisted that the proposal would benefit Americans, none guaranteed that it would lead to an economic recovery. They were also vague about purchasing methods and how they would arrive at prices for illiquid assets.
"We asked for broad-based authority to use a series of market-based approaches," said Paulson, "and we'll be using different approaches for different situations."
Bernanke added that they would consult with "experts" to figure out fair prices for illiquid assets that the market can't value on its own.
Lawmakers expressed the most concern about how the proposal will affect Main Street, as the U.S. consumer struggles with declining wealth, higher costs and rising unemployment.
"We risk the plan failing, which would be an even worse outcome for the markets, the economy and our country," Sen. Charles Schumer (D-N.Y.) said Monday morning as the hearing kicked off. He noted that $700 billion is an enormous investment in such risky securities for the taxpayer to take on, saying that "none of the money mangers ... would approve that sum without doing due diligence."
Schumer challenged Paulson's assertion that approval for the entire amount was necessary all at once. He proposed granting smaller installations of $150 billion at a time, a plan that Paulson rejected as inadequate to stabilize the markets.
The Treasury secretary's assertion harkened back to his claim a few months ago that if Congress granted regulators the authority to purchase large stakes in
, it would succeed in calming the markets.
"If you have a bazooka in your pocket and people know it, you probably won't have to use it," Paulson said at the time.
Turns out he was wrong, and Congress was not quick to forget, with several sarcastic references to the "bazooka" comment during Tuesday's hearing. The exchanges were testy at times, as senators took issue with everything from potential manipulation in reverse auctions to the inclusion of foreign banks or troubled assets outside of home loans, such as credit-card and student debt.
Most of all, lawmakers expressed worry that the plan simply wouldn't work.
"You're not going to be here after Jan. 20, 2009, and I'm going to have to answer to the 4.2 million people in Kentucky and all these other senators up here are going to have to answer to their constituents if this plan does not work," Sen. Jim Bunning said to Paulson. "And I am frightful to the point of almost panic that I don't see a solution in your plan to address this financial crisis that we are in."
Paulson said he shared the anger and frustration of lawmakers, but placed some of the blame on the outdated regulatory system set up years ago.
"You ask about the taxpayers getting on the hook?" said Paulson. "Guess what, they're already on the hook. They're on the hook with the system we had."
Tomorrow, Paulson and Bernanke will face scrutiny before the House Financial Services Committee, whose chairman, Barney Frank (D-Mass.), has said he will not compromise on demands to include a "golden parachute" provision. On
Monday, both Schumer and Frank criticized what they view as Paulson's unilateral approach to solving the crisis without compromising.
"Paulson, as clear as the nose on your face, is going to have to modify his bill," Schumer predicted. He added that the former
CEO is "sort of used to the corporate model where you give the CEO what he wants and he does what he wants. This is the government model."
Paulson and Bernanke have been working since last week to garner support for their proposal, which came to fruition after a dramatic string of events that caused sharp stock declines and a freeze in the credit markets. Some of Wall Street's top firms -- including Fannie, Freddie,
-- have collapsed, been bailed out or acquired on the cheap in just a matter of weeks.
Speculation remains rampant about what might happen to other banks that are still struggling with bad mortgage debt, and the proposal's passage will make their fate much clearer.
have all been caught up in the buyout rumor mill.
Wall Street's last two major brokerage houses, Goldman and
, also have not been spared, agreeing Sunday to change their status to become bank holding companies after facing extreme pressure on their stocks last week.