Monday, September 29, 2008

Tortuous route to Washington's US$700b bailout

Business Times - 30 Sep 2008
Intertwined with the long and hectic negotiations was the presidential election campaign, especially John McCain's


ONE of the most dramatic and consequential weeks in Washington's history ended on Sunday after the Bush administration and US lawmakers reached a deal over the US$700 billion rescue of US financial markets. The deal is expected to be approved by Congress.

The political and legislative spectacle unfolded on Capitol Hill after Treasury Secretary Henry Paulson and US Federal Reserve chairman Ben Bernanke had warned Congressional leaders that America could experience a devastating collapse of the financial markets and an economic slump akin to the 1929 stockmarket crash and the ensuing Great Depression.

US lawmakers gave the green light to the administration's bailout plan and its centrepiece - using some of the US$700 billion of taxpayer money to buy distressed assets from failing banks - before the Asian financial markets opened yesterday (Sunday night, Washington time).

Although none of the officials and the lawmakers raised that possibility in public, one of the worst-case scenarios that were being discussed in Washington was the potential for a global run on the US dollar if the White House and Congress failed to reach an agreement.

In any case, the long and hectic negotiations in Washington have sent shock waves across Wall Street and other global financial centres as the race to save Wall Street seemed to be intertwined with this year's historic race to the White House.

Events culminated in a summit at the White House last Thursday in which the two leading presidential candidates participated, and that followed President George W Bush's televised address to the nation on Wednesday that in terms of its gravity reminded viewers of his addresses to the American people after 9/11 and on the eve of the military attack on Iraq; unless we oust Saddam Hussein (then) or bail out Wall Street (now), the sky would fall.

One of the highlights of the political drama was the announcement by Republican presidential candidate John McCain on Wednesday that he was 'suspending' his presidential campaign and flying to Washington to involve himself in the negotiations over the bailout plan.

In fact, Senator McCain didn't arrive in Washington until Thursday morning while his campaign continued to broadcast television commercials attacking Democratic presidential candidate Barack Obama all through the week.

Moreover, before Mr McCain had made his announcement, there had been signs that Democratic and Republican leaders in Congress were forging an agreement on Mr Paulson's proposed plan, including by strengthening public oversight over the implementation of the bailout. Senator Obama called Mr McCain on Wednesday and suggested that the two candidates issue a statement expressing support for the negotiations on Capitol Hill.

Instead, Mr McCain decided to interject himself directly into the delicate deal-making and ended up playing into the hands of a group of conservative House Republicans who came up with an alternative plan to deal with the financial crisis.

While their plan was opposed by Mr Paulson and Mr Bernanke, it nevertheless forced the lawmakers to start the negotiations from scratch.

The stalemate on Capitol Hill was clearly bad news for investors in Wall Street and for President Bush and his aides, who decided to assemble all the major players, including Mr McCain, Mr Obama, the top US officials and Congressional leaders in the Roosevelt Room in the White House on Thursday.

But against the backdrop of the negotiations on Capitol Hill, the high-wired presidential election campaign and the anxiety in the financial markets, the meeting apparently descended into a shouting match after Mr McCain refused to endorse the administration's plan and insisted that the proposal advanced by the rebellious House Republicans be integrated into the talks.

As the presidential candidates and the rest of the attendees were leaving the Roosevelt Room, there was a growing concern in Washington that Congress would not be able to agree on the deal.

But after Mr McCain agreed to disengage himself and the campaign from the negotiations on Capitol Hill and announced that he would be attending the presidential debate at the University of Mississippi on Friday after all, the mood in Washington started to change. The House Republicans recognised that they would be losing their main political leverage: Mr McCain's intervention.

After two days of behind-the- scenes negotiations that involved Mr Bush, the Congressional leaders released their 106-page bill which would be posted online for all Americans to read.

Among other things, the compromise package would bar golden parachute-type retirement packages for executives in the companies benefiting from the bailout and would also make it possible for the government to recover some of the losses it might suffer as it tries to sell shares in the insolvent companies in the programme.

Both presidential candidates expressed support for the deal on Sunday. The bill would authorise the Treasury secretary to spend US$700 billion to buy illiquid assets off the books of banks and other financial firms.

Mr Paulson has told lawmakers that he expects to spend the money at a pace of about US$50 billion a month. That means that the bulk of the spending would be left to the next US president from next January.

Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.

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