The administration of President George W. Bush has requested Congressional approval to spend up to $700 billion to purchase illiquid assets from banks reliant on mortgage loans, marking the largest intervention by the U.S. government in the financial system since the Great Depression of the 1930s, U.S. media reported on Saturday.
The administration submitted the bill to Capitol Hill on Saturday night, said White House spokesman Tony Fratto. Treasury Secretary Henry Paulson, lawmakers, and their aides are expected to work on it over the weekend to reach an agreement on the legislation as soon as possible, he added. Democratic leaders in Congress expressed expectations that a vote on the bill would take place in the next few days. House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid previously announced that support for the bank bailout request would be conditioned on providing assistance to homeowners facing foreclosure and struggling with mortgage payments.
Nearly five million Americans are behind on their mortgage payments or in the foreclosure process, according to data from the National Association of Realtors. Paulson, Federal Reserve Chairman Ben Bernanke, and other officials have warned in recent days that the accumulation of illiquid securities on banks’ balance sheets has halted lending among banks and other financial institutions, posing a serious threat to the entire economy if urgent action is not taken. If Congress approves the plan, it would allow the Treasury Department to purchase securities derived from mortgage loans at a discounted price, for example, 30 to 50 cents on the dollar, hold them until the real estate market recovers, and then sell them for a profit. The success of the program may depend on the price at which the department buys the mortgage securities.
"The government can make a profit, a significant profit. The pricing mechanism will be the most important," said Jaret Seiberg, a financial services analyst at Stanford Group, a firm that focuses on economic policy research, to CNNMoney. President Bush stated on Saturday that the $700 billion plan he recommends for aiding the financial sector corresponds to the size of the problem. "This is a big package because the problem is big. The danger that threatened if nothing is done far outweighs the danger of this package," Bush said at a joint press conference with Colombian President Alvaro Uribe, who is visiting the U.S. The financial system bailout plan is part of extraordinary efforts by the U.S. government to stop a 14-month credit crisis that has led to the collapse of investment giants on Wall Street and has begun to threaten so-called "Main Street" – which in the U.S. is synonymous with small businesses, or that part of the economy outside the system of large corporations.
