The move is unprecedented and historical; the price tag, up to $700 billion, is staggering; reaction in the nation’s capital has been fluid, chaotic, enraged and, now, perhaps obstructionist. 

The Treasury Department wants broad legal authority to use taxpayers’ funds to salvage the nation’s financial system.  Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke sat before the Senate Banking Committee on Tuesday, September 23, grappling with the plan, known as the Troubled Asset Relief Program, which itself is in trouble.  Paulson and Bernanke claimed that their approach can, if properly crafted, finally establish stability in the volatile credit markets, establish a floor for the seemingly bottomless free fall in home prices, and unlock vital cash flow to lubricate a credit system which, according to Paulson, is clogged with nonperforming, toxic mortgage debt.

The Bush Administration, after staggering from one ineffective, case-by-case, institution-specific bailout to another (Bear Stearns, Fannie Mae and Freddie Mac, and Insurance giant AIG), suddenly reversed course and announced what it described as a more systemic, comprehensive plan to address the underlying weaknesses in the securities themselves.

Chairman Bernanke and Sec. Paulson, facing an increasingly skeptical Congress, are warning of dire consequences to the entire financial system unless they are granted sweeping latitude to take certain toxic assets off the hands of struggling banks and place them into a government-controlled holding entity, or “bad loan bank.”  A group of private sector asset management firms would then be retained to evaluate the assets and price them according to class of security, an extremely tricky proposition.  Pricing the securities too high would mean that taxpayers subsidize the banks excessively; pricing them too low would deter the banks from participating in the auction at all.  If the auctions are handled properly, Paulson and Bernanke argue, taxpayers will see some returns on their investments since they will eventually accrue in value as the economy improves. 

More robust congressional resistance began to build after the Washington Times reported that Sec. Paulson wanted the authority not only to purchase bad mortgage debt, but also bad credit card debt, auto loans, and student loans.  Paulson was unwilling to confirm or deny that report during Tuesday’s testimony, repeating only that Treasury needed maximum flexibility to enact the plan. 

Congressional Democrats, worried that the plan will be weighted too heavily in favor of big mortgage lenders, jumped into the fray with proposals requiring any company unloading bad debt on the taxpayers to cap its executives’ compensation.  There are also demands that taxpayers be granted an equity share in the company’s future profits. 

Both proposals evoked consternation from the Bush administration, which claimed that rapid action is essential, and extraneous actions might be too “punitive,” dramatically limiting industry participation in the auctions and dooming the plan to failure. 

Constituent calls to both Republicans’ and Democrats’ offices and radio talk shows nationwide are running aggressively against the plan and members on both sides of the aisle are expressing anger and frustration at being railroaded into accepting a plan that is still long on speculation and short on concrete details.  The fiscally conservative contingent in Congress is philosophically opposed to any bailouts of private sector firms, counseling that financial institutions that engaged in risky lending and securitizing practices be allowed to fail.  Members of the House Republican Study Committee (RSC) back an alternative plan which would involve no taxpayer money.  Instead, the RSC wants a suspension of certain newly-implemented accounting rules which force banks to value their long-term assets at today’s “fire-sale” prices, making them look financially unstable, while also impeding their ability to borrow capital on the market, as well as a two-year suspension of the capital gains tax to encourage the flow of capital into the economy.

With each passing day, still more questions arise.  It is not clear how the plan will be accounted for on the balance sheets of the federal budget, or how it might affect the Treasury’s credit rating and its ability to borrow. 

Calls to slow the process down considerably in order to review alternate legislative plans, even if it means members of Congress would forgo the traditional campaigning that precedes the November election, are rapidly being swamped by Congress’ overwhelming desire to “pass something” before the end of September.  The incursion of presidential politics has added more volatility to the debate.  At week’s end, both Sens. Barack Obama (D-Ill.) and John McCain (R-Ariz.) had converged in Washington, D.C. to participate in the contentious negotiations over a gargantuan financial rescue plan that will surely fall to one of them to implement in January, 2009.   

Senate Banking Committee Ranking Member Richard Shelby (R-Ala.), a long-time champion of increased oversight over Fannie Mae and Freddie Mac, succinctly expressed the dismay and recalcitrance of many members of Congress and taxpayers when he pressed Sec. Paulson and Chairman Bernanke:  “What if it doesn't work?” he asked.  “You assume it will work, but you can't assure us that you know it's going to work, because you thought some of the other plans were going to work.”

Taxpayers are on the hook one way or another regardless of whether Congress acts or not.  The questions are whether doing something – or the wrong thing – is better than doing nothing.