Wall Street Bailout Faces Lawmakers, Lobbyists

With Congress asked to act by Sept. 26, lawmakers and lobbyists take aim at Treasury Secretary Paulson's $700 billion bailout—and questions abound

by Theo Francis and Jane Sasseen

After years of financial mismanagement, it took less than two weeks for the markets to come unglued. Now, Congress and the Bush Administration are trying to pass a fix within the week. But with the clock ticking and lobbyists circling, big questions remain.

A brief proposal sent to Congress by the Treasury Dept.—with a request for action before Congress adjourns on Sept. 26—would authorize the Treasury to buy up to $700 billion of toxic mortgage-related assets and gradually resell them, with few strings attached. That is roughly what the U.S. has spent to prosecute the war in Iraq to date, and nearly $2,300 for every man, woman, and child in the country. Added to the $200 billion that could go toward shoring up Fannie Mae (FNM) and Freddie Mac (FRE), and the $85 billion the government has pledged to acquire most of insurance giant American International Group (AIG), the potential price tag for taxpayers soars to near $1 trillion. That's just under half what the country spends annually on health care.

Already, some in Washington are seeking to downplay the numbers. Treasury Secretary Henry Paulson and Representative Barney Frank (D-Mass.) have both stressed that while the Treasury has asked for $700 billion to spend up front, the government ultimately will recoup some of its costs over time by selling the assets it acquires. But it's impossible to say just how much the government will be able to recover or how much in the way of impaired assets it will need to buy before the financial system stabilizes. "We can't determine the costs today," Paulson said on Sept. 21 on NBC's Meet the Press.

Tax Hikes Necessary?

Whatever the eventual price tag, there's little doubt that the rescue will swell an already ballooning budget deficit, which some predict could top $1 trillion next year. Even before any of the spending to stabilize the financial sector, the deficit was projected to reach around $500 billion. Paulson has proposed raising the ceiling on the federal government's accumulated debt to $11.3 trillion from $10.6 trillion, and while some congressional Democrats are considering demands that any increase be limited to the bailout, there is little doubt that the next President will inherit a bigger financial challenge than expected. That would mean even greater constraints on plans for spending and tax cuts, proposals already straining the bounds of the possible. The more funding the financial bailout demands, the tougher the trade-offs the winner will have to consider when it comes to his priorities. Spending on health-care reform or tax cut packages will likely take the first hit. "You are about to put a giant hole through the budget," says Daniel Clifton, policy analyst for Strategas Research Partners, who predicts tax hikes no matter who wins in November. "You just can't raise the deficit to $1 trillion."

Moreover, it's far from clear that the final plan will retain the stripped-down structure of the original. Despite promises by lawmakers not to turn the legislation into a virtual "Christmas tree," with everyone adding their own favorite goodies to the bill, pressure is already growing to add to it, whether as part of the same bill or in parallel. One likely addition: relief for homeowners struggling to pay their mortgages— arguably the heart of the crisis, since those mortgages underlie the securities weighing down financial companies' balance sheets. Prominent Democrats, including Presidential candidate Barack Obama, argue that the government's bailout shouldn't aid only big corporations and their investors.