Democrats Seek Bailout Restraints

Senate Banking Committee Chair Christopher Dodd, at right with Sen. Charles Schumer, says it might be possible may meet approve the bailout by Friday, but it might take longer. (By Richard A. Lipski -- The Washington Post
 

By Lori Montgomery and David Cho

Washington Post Staff Writers
Monday, September 22, 2008; Page A01

Congressional Democrats considering the Bush administration's emergency plan to shore up the U.S. financial system yesterday countered with their own demands, presenting draft legislation giving the government power to cut salaries of chief executives at firms that participate in the bailout and slash severance packages for their top management.

Democratic leaders have broadly embraced the administration's proposal to spend up to $700 billion to take troubled assets off the books of faltering firms and are not questioning the need to give the Treasury Department expansive authority to halt the meltdown in world markets. But by attempting to limits executive pay, they risk alienating key Republicans who object to such restrictions and delaying passage of the rescue plan, which in turn may stir renewed fear in the markets.

Last night, the Federal Reserve said that the two remaining investment banks, Goldman Sachs and Morgan Stanley, will now be classified as regular commercial banks. That means that they will be subject to a broad and intensive set of government oversight rules that apply to regular banks. It also means that there are no remaining stand-alone investment banks.

There were five investment banks at the beginning of the year, but Bear Stearns was bought by commercial bank J.P. Morgan in the spring, Lehman Brothers has gone bankrupt, Merrill Lynch is being acquired by Bank of America, and now Goldman Sachs and Morgan Stanley are becoming commercial banks.

Treasury Secretary Henry M. Paulson Jr. was working last night to press House leaders to strike an agreement on the bailout bill by early Monday morning, according to three sources familiar with the matter. No deal with the Senate appeared close last night.

Sources familiar with Treasury's thinking said last night that the department is also continuing to monitor troubled financial firms and may have to intervene in the markets again this week, before Congress acts on the bailout, to address specific flashpoints.

Democrats sought to add oversight provisions and taxpayer protections to the proposal, which amounts to the largest government intervention in the private markets since the Great Depression. "We will not simply hand over a $700 billion blank check to Wall Street," House Speaker Nancy Pelosi (D-Calif.) said in a statement.

Under the proposal drafted by House Democrats, the Treasury would be required to force faltering firms that want to sell their troubled assets to the government to "meet appropriate standards for executive compensation." Those standards would include a ban on incentives that encourage chief executives to take "inappropriate or excessive" risks, a mechanism to rescind bonuses paid for earnings that never materialize and limits on severance pay.

Although Democrats have long sought to revamp the structure of compensation on Wall Street, their current demands are focused more narrowly on those financial firms choosing to avail themselves of the bailout.

The Democratic measure also would require the Treasury to use its status as the new owner of billions of dollars in mortgage-backed assets to reduce foreclosures by forcing banks to rewrite loans for distressed homeowners and forgive a portion of their debt. And it calls for a strict regimen of oversight, including independent audits and regular reports to Congress.

The proposal was presented to Treasury officials during marathon negotiating sessions this weekend over the bailout plan. House Republicans sent Treasury a separate set of demands, including the suggestion that a joint committee of Congress be created to oversee the program. And Senate Democrats yesterday were still assembling a list of provisions they hope to add, including new powers for bankruptcy judges to modify mortgages on primary residences, an idea House Democrats said yesterday that they had abandoned.

Though lawmakers had promised to work across party lines and between chambers to speed the rescue plan to passage by Friday, that process was not working smoothly.