Paulson Says Decisive Action is Needed

Congress has reservations about Wall Street bailout.

Treasury Secretary Henry Paulson said bluntly Tuesday the banking crisis that has wiped out iconic Wall Street investment banks last week could "spill over into the rest of the economy" without decisive action by Congress on the $700 billion banking bailout plan proposed by the Bush Administration.

"The best thing we can do is stabilize the financial markets so that people can get loans, small businesses can get loans, small farmers in your states can get loans, and big farmers in your states can get loans," Secretary Paulson told the Senate Banking Committee this morning. "The next thing is to go to work to make sure this doesn't happen again, but that's going to take longer."

Despite his plea for rapid action on legislation to authorize the bailout, senators from both sides of the aisle expressed reservations about the aid package.

Paulson, Federal Reserve Board Chairman Ben Bernanke, and Securities Commission Exchange Chairman Christopher Cox were grilled about the plan as senators said it was more a vague "proposal" rather than a "plan."

Paulson said he was "just shocked at the flawed regulatory system" that had allowed the meltdown in subprime lending to undermine the U.S. banking system. He noted that many complex financial derivatives used by lenders and investment funds were essentially unregulated. Paulson and Bernanke defended the bailout noting it was designed to step in and stop the hemorrhage of loan losses from such complex securities, not only on failed institutions, but also on "going concerns (banks)."

The three-page plan proposes that the Treasury set-up a financial facility that would buy up illiquid assets from lending institutions in a "reverse auction" where lenders would price their problem paper in the hope of getting it off their books.

Paulson and Bernanke face a House hearing on the bailout Wednesday. The Treasury plan and testimony from Tuesday's hearing is online at: www.banking.senate.gov.

Source: Feedstuffs

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