The Bush administration sent a $700 billion financial markets rescue plan to Congress yesterday where Democrats are looking to add aid for distressed homeowners and other measures to help average citizens in addition to Wall Street.
The plan to buy mortgage-related debt off the balance sheets of US banks and other financial institutions is part of an all-out attack on the worst financial crisis since the Great Depression.
The US Treasury Department would be authorized to purchase as much as $700 billion in mortgage-related assets from US-based institutions, according to a copy of the department's draft legislation obtained by Reuters.
In a related move, the proposal would raise the US government's debt limit to $11.315 trillion from $10.615 trillion.
Congressional leaders have promised swift action on the bailout package but many details are still to be worked out.
As lawmakers' aides huddled on Capitol Hill, President George W. Bush acknowledged the plan would put large amounts of taxpayer money on the line to buttress shaky financial markets.
"But I'm convinced that this bold approach will cost American families far less than the alternative," he said in his weekly radio address.
"Further stress on our financial markets would cause massive job losses, devastate retirement accounts, further erode housing values, and dry up new loans for homes, cars and college tuitions."
After government take-overs of individual firms failed to stop the spreading credit turmoil, US authorities are turning their attention to the underlying problem - the rising tide of bad mortgage debt that has choked the financial system.
The draft legislation said the department could hire asset managers to handle the debt purchases, which could include residential or commercial mortgages and related instruments that were originated or issued on or before last Wednesday. The authority to purchase ends two years from date of enactment, but the authority to hold the assets would continue.
Banking industry sources said "reverse auctions" would be held to purchase $50 billion tranches of debt, which could include residential and commercial mortgages and mortgage-backed securities. But that level of detail was not in the draft legislation. Congressional committees were to be briefed yesterday on the legislation, which could be considered by the US House of Representatives and Senate as early as next week.
Democrats have said they might try to use the financial bailout legislation to reduce home foreclosures and put some limits on the pay of chief executives.
"We must not forget Main Street as we work to address the crisis on Wall Street," Senate Majority Leader Harry Reid, a Nevada Democrat, said on Friday.
And some members of Bush's Republican Party are upset with the government's increasing involvement in the private sector.
"The free market for all intents and purposes is dead in America," said Sen. Jim Bunning of Kentucky. The US Treasury's proposal would "take away the free market and institute socialism in America," he said in a statement on Friday. But financial markets have shown their approval and may be disappointed if Congress does not swiftly back the measures.
US stocks chalked up their best day in six years on Thursday as talk of the more aggressive approach spread and on Friday the blue chip Dow Jones industrial average closed up 368 points, or about 3.4 per cent.
The US Treasury and Federal Reserve have already put close to $1 trillion of taxpayer money on the line to try to keep credit flowing.
And banks worldwide have suffered over $500 billion of write-downs and loan losses since the global credit crisis began over a year ago.
The crisis grew more acute this month with government takeovers of mortgage companies Fannie Mae and Freddie Mac, the bankruptcy of Lehman Brothers Holdings Inc, Bank of America Corp's shotgun agreement to buy Merrill Lynch & Co, and a bailout of insurer AIG. This came just six months after a government-backed rescue of investment bank Bear Stearns.