Congress, administration to prop up Wall Street

Congress and the Bush administration took steps Friday to reassure Wall Street of efforts to end a financial meltdown, even as they acknowledged the crisis threatens the pocketbooks of ordinary Americans.

House Speaker Nancy Pelosi (D-Calif.) offered support for the rescue plan first proposed Thursday night in her office by Treasury Secretary Henry Paulson, while other key members of Congress said the gravity of the crisis was leading Democrats and Republicans to work together.

{mosads}Republicans even canceled their long -running energy protest on the House floor because of worries about the country’s financial straits.

Troubled mortgage assets are clogging financial markets, choking off the flow of credit and preventing banks and other financial institutions from financing productive loans, Paulson somberly told reporters Friday at a brief press conference.

“As a result, Americans’ personal savings are threatened, and the ability of consumers and businesses to borrow and finance spending, investment and job creation has been disrupted,” Paulson said from a prepared statement.

Less than an hour later, President Bush described the crisis from the Rose Garden as a “pivotal moment for America’s economy.”

Paulson will work this weekend with congressional leaders from both parties on legislation that will allow the government to purchase troubled assets from banks. He said the program would cost “hundreds of billions,” and Bush said the action was not without risk.

But Paulson said the alternative would be worse.

“I am convinced that this bold approach will cost American families far less than the alternative — a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion,” Paulson said in a prepared statement.

Wall Street appeared to react favorably to the news, which included several moves by the government meant to restore investor confidence. The Dow Jones index jumped immediately Friday morning by 400 points.

Paulson said Treasury would come to congressional leaders with legislation, and then “flesh out the details” of the program.

“We’re going to be asking them to take action on legislation next week,” he said.

Pelosi offered support but also caution to Bush during a Friday morning phone call

“As I told the president this morning, we are committed to quick, bipartisan action,” Pelosi said in a statement, “while ensuring that we uphold key principles — insulating Main Street from Wall Street and keeping people in their homes by reducing mortgage foreclosures, restoring market confidence and protecting American taxpayers from incurring hundreds of billions of dollars of debt.”

Democrats are trying to push through a $50 billion economic stimulus bill that would include an extension of unemployment benefits and food stamps, as well as infrastructure and Medicare funding. But it’s not clear if any of these proposals will be added to the rescue plan that the administration said must be passed by the end of next week, when Congress is set to adjourn for the elections.

Senate Banking Committee Chairman Chris Dodd (D-Conn.), who huddled with members of his panel Friday, said the measure will not be turned into a “Christmas tree.” At the same time, he said the measure will include provisions aimed at the housing crisis, which is the root of the financial turmoil on Wall Street.

“We want to deal with causes and effects here, if we're going to bring to closure the most serious — the most serious economic challenge of our lifetime,” Dodd said.

Congressional leaders had already offered support for the concept Thursday night during a meeting with Paulson and Federal Reserve Chairman Ben Bernanke in Pelosi’s office attended by scores of key members from both parties.

The administration sought last night’s meeting, saying that Paulson and Bernanke needed to meet right away and that “tomorrow would be too late,” a Democratic aide said.

{mospagebreak}Earlier, during an appearance on “Good Morning America,” Dodd said it was as serious a situation as he’d seen in his 28 years in Congress, and that the language used during Thursday’s meeting suggested “we’re literally maybe days away from a complete meltdown of our financial system.”

He said the gravity of the crisis resulted in a rare moment in which members of both parties committed to working together.

Republicans even canceled their regular floor protest on energy policies to avoid appearing too political at a time of financial crisis. This is the first time the regular protests have not been held since they began in early August.

{mosads}“In light of the current economic situation, House Republicans will be fully engaged in discussions relating to the most pressing issue of the day, working on a bipartisan solution to steady the financial markets,” a Republican aide wrote in a floor update.

Still, politics did not disappear from the discussion altogether. GOP presidential candidate Sen. John McCain (Ariz.) in a Friday speech blasted the “do-nothing” Congress for claiming the crisis was not its fault. Democrats, meanwhile, indicated they’d try to ensure that the meltdown and the solution are seen as the result of Bush policies.

Paulson, who has come under criticism from his own party for the $85 billion bailout this week of insurance giant American International Group, suggested the government had no choice but to take dramatic actions.

“This is what we need to do,” Paulson told one reporter in response to a question about whether there were alternatives. He said until the U.S. gets stability in the housing market, it will not get stability in the financial market.

The steps announced by the government Friday include emergency action by the Securities and Exchange Commission (SEC) to temporarily prohibit “short selling” of financial stocks.

Short selling, in which investors borrow a stock, sell it and then make money when the price of the stock falls, has contributed to the recent sudden price declines in the securities of financial institutions unrelated to true price valuation, according to the SEC.

Paulson also said mortgage giants Fannie Mae and Freddie Mac, which the government bailed out earlier this month, would increase their purchases of mortgage-backed securities in order to provide more funding to mortgage markets. Treasury also will expand the mortgage-backed securities purchase program it announced earlier this month, Paulson said.

Finally, Treasury announced on Friday the establishment of a “temporary guaranty program for the U.S. money market mutual fund industry.” Money markets, considered a safe investment, have experienced massive withdrawals in recent days as the financial crisis has intensified.

Mike Soraghan, Sam Youngman, Manu Raju, Jackie Kucinich and Jared Allen contributed to this story.