An unprecedented government plan to buy up to $US700 billion ($840 billion) in illiquid bank assets marks another step in US Treasury Secretary Henry Paulson's ascension to the pinnacle of power in Washington.
In a period of less than two weeks, he led a government takeover of mortgage finance companies Fannie Mae and Freddie Mac, reshaped Wall Street by letting Lehman Brothers fail, helped engineer a $US85 billion rescue of AIG, a top global insurer, and asked Congress to pass the massive plan to clear bad assets from bank balance sheets.
President George Bush has stood by and given him green lights the whole way.
Newsweek crowned Paulson "King Henry'' on its latest cover, while television network CNBC has declared that the world's financial capital has moved from lower Manhattan to Washington.
But while the hard-driving ex-Goldman Sachs boss' stamina and expertise in managing the year-long credit crisis have earned him the respect and trust of many in Washington, an unfettered financial bailout plan may be a step too far.
Lawmakers have increasingly voiced reluctance to hand him a check for $US700 billion of taxpayer funds to use at his discretion with few strings attached.
"This proposal is stunning and unprecedented in its scope and lack of detail,'' Senate Banking Committee chairman Christopher Dodd told Paulson at a hearing on Tuesday.
The Connecticut Democrat said the Treasury plan lacked oversight to ensure it would be executed transparently.
The panel's top Republican, Richard Shelby, voiced a deeper concern - that the plan might not work.
"We could very well spend $US700 billion, or $US1 trillion, and not resolve the crisis,'' he said.
Once again, Paulson, who has spent his career as the most free-market of capitalists, finds himself in a position of defending government intervention at great expense.
His case-by-case approach to crisis management has averted some disastrous financial collapses but has failed to calm markets for more than a few days at a time. The underlying problem is that American home prices continue to fall, weakening the assets used to finance them.
His now-famous request in July for a ``bazooka''-like backstop authority to lay waste to market concerns over Fannie Mae's and Freddie Mac's viability did not work as planned.
Instead of deterring market fears, it raised questions over how it would be used, helping seal a federal takeover of the companies to ensure mortgage funds kept flowing.
Setbacks and criticisms, however, have not stopped Paulson. Priding himself on running "straight at'' problems, he is pushing Congress for sweeping authority to avoid what he warns would be a costly financial-sector meltdown.
"I don't like to be in the position of asking for things, and answering to the American taxpayer on this,'' Paulson told lawmakers. "It's a sad story, but the American taxpayer is already on the hook.''
Paulson also has had to battle perceptions that as the former head of Goldman Sachs, he is taking care of Wall Street before Main Street and, at the end of the day, may personally profit from the bailouts.
Paulson sold his Goldman stock - some $US500 million worth - in 2006, before he took office. He holds over $US50 million in a blind trust, according to a federal disclosure report and more than $US26 million in the Vanguard Prime Money Market Fund. The money market holdings would be protected by a new Treasury program to guarantee such assets.
Bank of America analyst Jeffrey Rosenberg said this week that Wall Street investment banks would be in the best position to benefit from the Treasury's proposed plan to mop up bad assets because their accounting rules required more aggressive asset write-downs than commercial banks.
Banks that have not written down their investments would be less likely to sell assets to the US Treasury.
"Moreover, the recognition of these market values may actually hasten the pace that banks need to take write-downs, further exposing their capital inadequacy,'' Rosenberg said in a research report, adding that this could increase near-term market worries.
Nonetheless, Paulson's supporters note that he has inflicted pain on shareholders when the government came to the aid of struggling financial firms. His actions are aimed squarely at the financial system that funds the economy, they say.
"Hank's the right guy for now,'' New York Mayor Michael Bloomberg told NBC's "Meet the Press'' program on Sunday.
"He knows what goes on on Wall Street, he understands these complex financial instruments in a way most people do not and most Treasury secretaries do not. So, if I had to have one person at the helm today, I would pick Hank Paulson.''
But his reputation won't be enough to keep Congress from tinkering with the plan by adding on provisions for equity stakes in firms that unload bad assets, or limiting executive pay at these firms.
At the very least, more specific oversight provisions appear likely.
Reuters
