Published September 24, 2008

Paulson minces no words to get second 'bazooka'

US Treasury chief works to head off opposition to bailout plan in Senate testimony

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(WASHINGTON) US Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke yesterday urged Congress to act swiftly to put in place a US$700 billion financial system bailout, warning delay would put the economy at risk.

Testifying before a sometimes-sceptical Senate Banking Committee, they said financial markets were in serious stress and needed to be stabilised quickly by cleansing them of illiquid assets.

In his opening statement, Mr Paulson praised Congress for its previous actions, which gave the Treasury new powers to take over mortgage-finance companies Fannie Mae and Freddie Mac.

'To the comments made about Fannie and Freddie and a bazooka, you all can be darn glad you gave us the bazooka, because we needed it,' Mr Paulson told the panel. In July, Mr Paulson referred to the authority to take over Fannie and Freddie as having a 'bazooka' to stabilise mortgage markets.

Mr Paulson said the new powers he sought were essential for the US to deal with a housing crisis.

He wants lawmakers to approve a massive war chest, funded by taxpayers, to buy distressed debt from financial institutions to try to keep credit markets from choking up.



Lawmakers have vowed to move without delay, but also are insisting on changes. These include more protection for taxpayers and limits on compensation for executives of firms that would be offloading their bad assets onto the government.

'Action by Congress is urgently required to stabilise the situation and avert what could otherwise be very serious consequences for our financial markets and our economy,' Mr Bernanke said.

A rising tide of US home foreclosures and loan defaults has spawned the greatest financial crisis since the Great Depression and, after a series of emergency actions to bolster individual financial firms, US authorities say they must now try to save the system as a whole.

Mr Paulson said the broader economy was under threat and said it was essential to move decisively beyond the case-by-case approach followed in the government takeover of Fannie and Freddie and the bailout of insurer American International Group.

'We saw market turmoil reach a new level last week, and spill over into the rest of the economy,' Mr Paulson said. 'We must now take further, decisive action to fundamentally and comprehensively address the root cause of this turmoil.'

White House spokesman Tony Fratto, asked what would happen if the bailout plan cannot be put in place this week, replied: 'You should think of that as unthinkable.'

Analysts said it appeared Mr Paulson and Mr Bernanke were trying to head off opposition to the bailout plan in Congress by stressing the dire consequences of failing to move quickly.

'The policy war on the financial crisis is as much about the psychological impact as about real intervention. It's no surprise, therefore, that the engineers behind the bank remedy plan are calling for fast implementation,' said Lena Komileva, G7 market economist at Tullet Prebon in London.

Mr Paulson said there was 'bipartisan consensus' for a quick legislative solution to the crisis and he urged Congress to 'avoid slowing it down with other provisions that are unrelated or don't have broad support'. However, he and Mr Bernanke provided few clues as to how they view separate add-on provisions suggested by lawmakers.

In addition to curbing executive pay and adding more safeguards for taxpayers, congressional Democrats also want to add assistance for homeowners facing foreclosure.

Mr Bernanke said financial market stress was worsening and said that heightened the urgency of a bailout plan. 'If financial conditions fail to improve for a protracted period, the implications for the broader economy could be quite adverse,' he said. 'At this juncture, in light of the fast-moving developments, it is essential to deal with the crisis at hand.' - Reuters, Bloomberg