The Bailout: Public Anger, Private Talks

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The response from lawmakers to the bailout plan was generally chilly. Most indicated that they agreed some action was necessary soon. But many took the Bush Administration to task for initially proposing to give itself nearly complete discretion, with no oversight and no judicial review. Administration officials have since indicated that they would accept some measure of oversight, though details remain unclear. Congressional proposals include an inspector-general's office, regular audits, and weekly public disclosures, among other measures.

Taking Wall Street to Task

Senators of both parties demanded more oversight and transparency, questioned the Administration's decision not to give taxpayers a stake in companies benefiting from the Treasury program, and above all insisted that the final measure should clearly and in many cases directly assist homeowners struggling to pay their mortgages. Many Democrats called for restrictions on executive compensation, and several held out hope that the final measure would allow judges to modify the terms of mortgages in bankruptcy court, much as other loans can be modified.

Throughout, the senators took Wall Street and the financial sector vigorously to task. Some Senators expressed skepticism that the multibillion-dollar bailout would resolve the economic threat. "Wall Street bet that the government would rescue them if they got into trouble; it appears that bet may be the one that pays off," said Senator Richard Shelby (R-Ala.). "I do not believe, however, that we can solve this crisis by spending a massive amount of money on bad securities."

Congressional staff and political analysts say that, while many lawmakers have been impressed by Bernanke and Paulson with the need to move swiftly, they also have constituents to satisfy. And those constituents appear to be taking a dim view of the Treasury's proposal. Some of those insiders predicted that a compromise would likely be reached by week's end, and said much of the bickering over specific provisions would fall by the wayside—with each side getting a few key concessions—as a kind of posturing aimed at placating constituents. "The phones are burning up with angry constituents," says Howard Glaser, a former Clinton housing official and mortgage-industry consultant. "Congress is looking for something to say, 'Here's help for households.'"

Calls for Due Diligence

Indeed, calls for "foreclosure assistance" peppered the hearing. Dodd complained at the outset that Treasury's proposal "would do nothing, in my opinion, to save a single home, at least up front."

Lawmakers have been reluctant to embrace Paulson and Bernanke's argument that helping the financial markets will help Main Street to prevent foreclosures. "The very best thing we can do is make sure the capital markets are open and that lenders are continuing to lend," Paulson said. Instead, draft legislation circulated for discussion in both the House and Senate this week have included provisions designed to help homeowners stave off foreclosure directly.

In the hearing, lawmakers also took issue with the Administration's request for access to $700 billion, and by the hearing's end, several seemed to be mulling the possibility of handing over only a portion of the $700 billion the Administration has requested and doling out more as results warrant. "None of the thousands of money managers would invest that sum without the appropriate due diligence," said Senator Charles Schumer (D-N.Y.) "This hearing today and the discussions that will follow are our due diligence."

Profit Not Likely

Paulson stressed that the loans and mortgage-related securities Treasury acquired would eventually be sold to recoup some of the outlay, and acknowledged that the agency wasn't likely to use the full amount quickly. But he said the Treasury needed access to the full amount from the beginning. "The best way to protect the taxpayer…is to do something that has the maximum chance of working," he said. "We need market confidence and we need the tools to work with."

A few lawmakers suggested that the rescue program, run judiciously, might break even or turn a small profit. Paulson and Bernanke made clear that they didn't consider a profit likely.

Paulson and Bernanke took perhaps greatest issue with suggestions that the government should receive stakes in companies that seek federal aid, and that the companies should also accept limits on executive compensation. Paulson noted that the government has acquired stakes in companies it has saved from insolvency, including a 79.9% stake in insurer American International Group (AIG). But he stressed that the plan for systematically buying up troubled securities depends on a broad spectrum of companies participating. Layering conditions on the program would dissuade them. "If we have to have companies grant equity stakes, grant options, that would render this ineffective," Paulson said. Compensation reforms, meantime, can wait for more deliberate regulation in the near future, he said.

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Francis is a writer in BusinessWeek's Washington bureau. Sasseen is Washington bureau chief for BusinessWeek.