Congress examines $700 billion rescue program

[November 13, 2008]  WASHINGTON (AP) -- While the Bush administration shifts course on its $700 billion rescue plan, Congress is examining whether even bigger changes should be made in the program in light of the deteriorating economy and soaring mortgage foreclosures.

The debate may not be resolved until President-elect Barack Obama takes office on Jan. 20 and pursues policies for administering the rescue program that are likely to be more closely aligned with his Democratic allies in Congress.

In anticipation of the change of administrations, Democrats were holding hearings in both the House and Senate on Thursday examining various aspects of the most serious financial crisis to hit the country in 70 years.

The House Oversight Committee was examining the role that hedge funds may have played in recent market turbulence. Among those scheduled to testify was billionaire investor George Soros, chairman of Soros Fund Management.

Meanwhile, the Senate Banking Committee will hear from executives of a number of financial institutions including Bank of America, JPMorgan Chase and Wells Fargo on the issue of how the government's $700 billion rescue effort is operating and particularly whether the government should be requiring more commitments on the use of the money to address rising mortgage foreclosure problems.

Treasury Secretary Henry Paulson announced Wednesday that the administration had decided to scrap what had originally been the centerpiece of the program -- a proposal to buy troubled assets to get them off the books of banks as a way of promoting increased lending.

Instead, Paulson said the administration will proceed with an alternative plan to spend $250 billion to buy stock in the banks as a way of bolstering their financial situation and accomplishing the same goal -- getting the institutions to return to more normal lending.

However, critics contend the administration should be imposing more restrictions on the stock purchases as a way of insuring that the banks will use the government resources to increase lending rather than just hoarding the cash or using it to acquire other banks or boost dividends for stockholders.

Sen. Charles Schumer, D-N.Y., said even with the changes in the rescue plan he was still disappointed in the administration's unwillingness to issue strict guidelines to ensure that participating firms use the funds to increase lending.

"In these difficult times, fear is still overwhelming confidence," Schumer told reporters on Tuesday.

More reports detailing the difficulties facing the economy were expected on Thursday with the Labor Department releasing its latest look at weekly applications for unemployment benefits, the Commerce Department reporting on the trade gap for September and the government reporting on the budget deficit for October.

The level of jobless claims was expected to remain at levels indicating the labor market is under severe strains, reflecting what many economists fear could be a deep and prolonged recession.

The government reported last Friday that the unemployment rate soared to a 14-year high of 6.5 percent in October as businesses cut another 240,000 jobs.

The trade deficit was expected to show some improvement, declining to $57 billion in September, compared to $59.1 billion in August, reflecting a big drop in the price of imported oil and a weakening economy, which is dampening demand for other imports.

The budget deficit, however, was expected to show a big increase in October, the first month of the new budget year, rising to $101.5 billion, compared to $57 billion in October 2007. The soaring costs of the bank rescue and the weak economy are expected to put the country on track to run up a record deficit for the current budget year of between $700 billion and $1 trillion, a staggering sum for a single year.

Despite its new flexibility, the administration said Wednesday it remains opposed to using the rescue fund to bail out the ailing auto industry or to provide guarantees for home loans, an idea that supporters contend offers the greatest hope for helping legions of Americans who are facing foreclosure.

Congressional Democrats felt otherwise on autos, and strongly. House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid were pressing for quick passage of a major package for carmakers during a postelection session that begins next Tuesday, and one key House Democrat was putting together legislation that would send $25 billion in emergency loans to the beleaguered industry in exchange for a government ownership stake in the Big Three car companies.

Paulson told reporters Wednesday that the administration was exploring the possibility of setting up a program in conjunction with the Federal Reserve that would provide support for the $1 trillion market in securities that fund such vital consumer products as credit cards, auto loans and students loans. About 40 percent of consumer credit is supplied through the sale of these securities that are backed by payments consumers make on their credit cards and other loans.

The administration has already spoken for all but $60 billion of the initial $350 billion supplied by Congress, including the $250 billion for direct stock purchases from banks and $40 billion for a new loan supplied on Monday to help stabilize troubled insurance giant American International Group.

[Associated Press; By MARTIN CRUTSINGER]

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