The federal government stepped in with an emergency bailout of collapsing financial institutions on Wall Street last week because it could not wait for regulatory agencies to sort through the “crisis situation,” Treasury Secretary Henry Paulson said Sunday.
“Financial institutions [were] clogged with illiquid loans,” Paulson said in an interview on NBC’s “Meet the Press,” effectively freezing credit markets and choking off money to keep Wall Street humming.
“This is an urgent matter, and we need to move quickly,” Paulson said in urging Congress to immediately approve the Bush administration’s request for sweeping authority to bypass regulatory agencies and directly take over the bad mortgages and mortgage-backed securities.
The Bush administration estimated that its plan, the biggest government bailout since the Great Depression, would cost $700 billion. Financial analysts said it could cost as much as $1 trillion, but Paulson maintained that the final bill would be much smaller.
The projected price tag “is not an expenditure,” Paulson said. The bad loans “will be held and then they will be resold at some time.”
“The cost won’t be anything like the cost of buying up these assets [because] these costs will come back” when they are sold off, he said.
Stability first, then long-term repairs
Democrats in Congress accepted that swift action was needed but insisted that any legislation should include significant regulatory reform and protection for middle-class homeowners, especially tougher restrictions on foreclosures and an expansion of jobless benefits.
Paulson agreed that government regulations should be overhauled but said the immediate need was “authority to move very quickly,” and he called on lawmakers to pass the bailout this week.
“Here we’re preventing failure,” Paulson said. “Once we get this stabilized, there’s a lot we can talk about in reform.”
He added: “This is not something that we wanted to do. This was something that was very necessary.”
Paulson blasts ‘irresponsible practices’
The government jumped into action after some of the largest U.S. investment banks began to collapse last week. Lehman Brothers declared bankruptcy, and Merrill Lynch was bought at a deep discount by Bank of America. Meanwhile, the world’s largest insurer, AIG, came within hours of going out of business before the government stepped in with an $79.9 billion takeover.
The developments — coming on top of the government’s bailout of Bear Stearns in March and its rescue of mortgage giants Fannie Mae and Freddie Mac — made it clear that the system was broken, Paulson said.
“There have been excesses for a long time,” he said, denouncing “irresponsible practices” in which mortgages were extended to unqualified buyers, then “sliced and diced and sold all over the world.”
“It’s terrible, inexcusable, and we need to deal with it,” he said.
Paulson defended the takeover of AIG, even as the government let Lehman Brothers die, saying, in essence, that AIG was too big and too badly run to let fail.
“It would have been, in my judgment, unthinkable for AIG to declare bankruptcy,” he said, outlining “catastrophic” impacts on financial markets, money market funds and the savings of individuals and families.
In a patchwork system that saw AIG report to more than 50 insurance regulators, he said, the company evolved into “a hedge fund on top of insurance companies.”
“It should never have happened,” he said.