Senate passes $634B spending bill

WASHINGTON (AP) -- Automakers gained $25 billion in taxpayer-subsidized loans and oil companies won elimination of a long-standing ban on drilling off the Atlantic and Pacific coasts as the Senate passed a sprawling spending bill Saturday.

The 78-12 vote sent the $634 billion measure to President Bush, who was expected to sign it even though it spends more money and contains more pet projects than he would have liked.

The measure is needed to keep the government operating beyond the current budget year, which ends Tuesday. As a result, the legislation is one of the few bills this election year that simply must pass. Bush's signature would mean Congress could avoid a lame-duck session after the Nov. 4 election.

White House spokesman Tony Fratto said the bill "stands as a reminder of the failure of the Democratic Congress to fund the government in regular order." But, he said, it "puts the United States one step closer to ending our dependence on foreign sources of energy" by lifting the offshore drilling ban and opening up huge reserves of oil shale in the West.

The Pentagon is in line for a record budget. In addition to $70 billion approved this summer for operations in Iraq and Afghanistan, the Defense Department would receive $488 billion, a 6 percent increase. The spending bill also offers aid to victims of flooding in the Midwest and recent hurricanes across the Gulf Coast.

Such a huge bill usually would dominate the end-of-session agenda on Capitol Hill. But it went below the radar screen because attention focused on the congressional bailout of Wall Street.

The measure settles dozens of battles that have brewed for months between the Democrats who run Congress and the White House and its GOP allies.

The administration won approval of the defense budget. Democrats wrested concessions from the White House on $23 billion for disaster-ravaged states, a doubling of low-income heating subsidies, and smaller spending items such as $24 million more for food shipments to the elderly.

The loan package for automakers would reward them with $25 billion in below-market loans, costing taxpayers $7.5 billion to subsidize the retooling of plants and development of technologies to help U.S. carmakers to build cleaner, more fuel efficient cars. Companies would not have to begin repaying the loans for five years, drawing objections from Sen. Jon Kyl, R-Ariz., who predicted they would return for more help when the money is due.

Republicans made ending the coastal drilling ban a central campaign issue this summer as $4-plus per gallon gasoline stoked voter anger and turned public opinion in favor of more exploration.

The action does not mean drilling is imminent and still leaves the oil-rich eastern Gulf of Mexico off limits. But it could set the stage for the government to offer leases in some Atlantic federal waters as early as 2011.

Also in the bill is money to avert a shortfall in Pell college aid grants and solve problems in the Women, Infants and Children program delivering healthy foods to the poor.

In addition to the Pentagon's budget, there is $40 billion for the Homeland Security Department and $73 billion for veterans' programs and military base construction projects. Combined with the Defense Department's spending, that amounts to about 60 percent of the budget work Congress must pass each year.

Democrats came under criticism from the GOP for short-circuiting the normal process for a spending bill after it became clear that Republicans would force difficult votes on the drilling ban.

Democrats also wanted to avoid an election-year clash with Bush that would have played in his favor. They are willing to take their chances that Democrat Barack Obama will be elected president in November and permit increases for scores of programs squeezed by Bush each year.

Bush had threatened to veto bills that did not cut the number and cost of pet projects in half or cause agency operating budgets to exceed his request. Democrats ignored the edict as they drafted the plan and the White House has apparently backed down.

Taxpayers for Common Sense, a watchdog group, discovered 2,322 pet projects totaling $6.6 billion. That included 2,025 in the defense portion alone that cost a total of $4.9 billion. Critics of such projects are likely to discover numerous examples of links to lobbyists and campaign contributions. 


House vote expected on oil drilling
House passes drilling bill

Gas shortages: get ready for more

NEW YORK (Fortune) -- While Congress and Bush administration officials have been working to complete a bailout plan and stem the financial contagion on Wall Street, a different kind of economic crisis emerged across the South this week: A severe, hurricane-related gasoline shortage has curtailed trucking from Atlanta to Asheville, N.C., and created a wave of panic buying among motorists.

The return of gas lines has largely flown under the radar of politicians who are usually keenly attuned, because their constituents are, to what's going on at the pump. But more of the Capitol gang should be paying attention to this.

That's because nationwide our gasoline inventory is shockingly low. Liquidity must be restored soon to this market, or we could be facing a crippling run on the gasoline bank. And if you think Americans are outraged about Wall Street, wait until their Main Street grocery store doesn't get the bread and milk delivery for a week or two.

Back to the '70s

The scenes over the past several days in places like Nashville, Tenn., Anniston, Ala., and western North Carolina looked like file footage from 1979 - with bags over empty gas pumps and quarter-mile long lines of cars waiting to fill up at stations that hadn't run out. AAA reported that drivers were so desperate that they were following tankers to gas stations to ensure a fill-up.

In Georgia, Gov. Sonny Perdue got a waiver from the Environmental Protection Agency to temporarily allow stations to sell high-sulfur gasoline. (Correction: An earlier version of this story said Louisiana received the waiver and incorrectly named Perdue as that state's governor.) In Alabama, Gov. Bob Riley ordered a state of emergency to prevent price gouging by station owners that do have gas.

What's going on? The immediate answer is that the double whammy of Hurricanes Gustav and Ike, which swept through the Gulf of Mexico earlier this month, caused much of the Gulf's oil drilling and refinery production to be shut down. In particular Ike, which hit refinery-rich Southeastern Texas on Sept. 13, caused massive power outages in the Galveston and Houston areas.

As of this week, more than a dozen refineries around Texas City and Port Arthur were not operating at full capacity and, according to the Department of Energy, six refineries, with a combined capacity of 1.6 million barrels a day, were still not running at all.

A bigger problem

But while the current shortages can be traced directly to the two hurricanes, the severity of the problem points out a bigger issue: The U.S. has been operating for a while with razor-thin spare gasoline capacity.

In its most recent Weekly Oil Data Review, Barclays Capital pointed out that the U.S. gasoline inventory has reached its lowest level since August 1967, when demand was a little more than half its current level of 9.3 million barrels a day. At 178.7 million barrels, inventories are 21.6 million barrels below their five-year average.

None of this surprises industry watchers such as Matt Simmons, the chairman of Houston energy industry investment bank Simmons & Co. and chief spokesman for the Peak Oil movement. I recently wrote a profile of Simmons for Fortune ("The prophet of $500 oil") and I can report that he has been warning about the potential of gasoline shortages in the U.S. for months.

"Our system is so fragile," he told me recently. "All you need is a tiny change to go from 'Oh, we're in fine shape' to an unmitigated disaster."

Simmons points out that the gasoline weekly stock reports have been trending sharply downward since last winter (with a brief upturn in the spring), and that even before Gustav and Ike we were in "just in time" supply mode.

Getting back to a safer level of extra capacity isn't simple, either. Once the refineries get back up and running, they'll drain the already low crude oil inventories. Unless gasoline demand stays low, Simmons believes, we'll have a hard time clawing back to stability.

That's why he worries about a top-up catastrophe that could cripple the trucking industry and disrupt food deliveries.

As he told me the other day: "If we end up having gasoline shortages, the odds are about 90% that Americans will do what we always do: We'll top up our tanks. And in topping up our tanks, within three or four days we'll drain the pool dry and then within seven days we'll run out of food."

That sounds awfully dire. And it probably won't happen. But, then again, a couple of months ago hardly anybody would have predicted that AIG would collapse, Congress would be mulling a Wall Street bailout, and '70s-era gas lines would be back.  


Gustav to test lessons of Katrina

Fed battles credit crisis

WASHINGTON (AP) -- The Federal Reserve and other countries' central banks announced new steps Monday that makes billions of dollars available to squeezed banks here and abroad to battle a worsening credit crisis that threatens to unhinge the U.S. economy.

The Fed said the action is intended to "expand significantly" the cash available to financial institutions in an effort to relieve to the worst credit crisis since the Great Depression. In taking the action, the Fed cited "continued strains" in the demand for short-term funding.

Central banks will continue to work closely and are prepared to take "appropriate steps as needed" to ease the crisis and get banks lending again, the Fed said.

Under one new step, the Fed will boost the amount of 84-day cash loans available to U.S. banks. The Fed is increasing the amount to $75 billion, up from the current $25 billion starting on Oct. 6. Banks bid on a slice of the loans at an auction.

Doubling the amount of cash

That move will triple the supply of 84-day loans to $225 billion, from $75 billion, the Fed said.

Meanwhile, the Fed will continue to make $75 billion worth of shorter, 28-day loans available to banks.

All told, the total amount of cash loans - 84-day and 28-day - available to banks will double to $300 billion from $150 billion, the Fed said.

Moreover, the Fed will make a total of $620 billion available to other central banks, expanding ongoing currency "swap" arrangements with them where dollars are traded for their currencies. That's up from $290 billion previously in such arrangements.

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Swiss National Bank and the central banks of Denmark, Norway, Australia and Sweden are involved in those swap arrangements.

The move comes as the U.S. financial meltdown's tendrils have ensnared banks in Britain, the Benelux and Germany. 


Central banks pump up the dollars
Fed pumps out more dollars

Golden parachutes here to stay

NEW YORK (CNNMoney.com) -- Many advocates of the proposed $700 billion bailout of Wall Street trumpet its limitations on large pay packages and so-called golden parachutes for some of the top executives at the troubled firms that will get help.

Barack Obama and John McCain, in endorsing the rescue plan, pointed to the restrictions on Wall Street pay. And the curbs were a key point stressed by congressional leaders on both sides of the aisle when they spoke about the deal Sunday.

"This is the first time in the history of United States that anything has been done by Congress to curtail excessive CEO compensation," said House Financial Services Chairman Barney Frank, D-Mass, on Sunday. "It's not everything we'd like, but it's a very good beginning."

But those hoping for an end to golden parachutes - the large pay packages that top executives get when they leave a company - may end up disappointed.

Under the bill, Wall Street executives who already have golden parachutes are likely to keep them even if their companies get government help.

"We're not abrogating contracts," said a Treasury official who briefed reporters Sunday.

Another Treasury official said that even future golden parachutes could be paid as long as they're triggered by the sale of a company and not by involuntary termination or corporate failure.

"Our key focus is that we do not want to reward poor performance," he said.

How will the program work

Most firms getting help will sell mortgage-backed securities to the government through an auction. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke have stressed that it's important to get as many firms as possible to participate. And imposing tougher rules on golden parachutes could keep some firms from joining the auctions, according to Treasury officials.

Some firms facing more severe problems are likely to sell assets directly to the government. Treasury is more likely to be tougher on golden parachutes for those firms, according to the Treasury officials.

Nell Minow, the co-founder of the Corporate Library, a research firm that has pushed for greater shareholder limits on executive pay, said golden parachutes in these cases could end up helping taxpayers.

"Golden parachutes, when done right, are there to align the interest of the executives and the investors," Minow said. She said they make executives less worried about losing their jobs and more willing to pursue sales that can benefit investors.

And in the case of firms in the bailout, she said, "the investors are the taxpayers."

While she would like to see still stricter limits on CEO pay in the firms that are being bailed out, she's encouraged by some other restrictions in the bill that aren't getting as much attention as golden parachutes. One is the so-called clawback provision that would force executives to give up past bonuses and incentives when their companies restate past financial results that had earned them that pay.

"The clawback provisions are very strong," she said.

Minow said she's still hopeful that Treasury will impose even stricter restrictions on golden parachutes and pay as it implements the program and starts to interact with the firms on a case-by-case basis.

And even if the bill doesn't rid Wall Street of golden parachutes, Minow sees it as a good first step toward larger changes down the road. 


Rescue bill unveiled

Rescue bill unveiled

NEW YORK (CNNMoney.com) -- The federal government would put up as much as $700 billion in a far-reaching plan to rescue the nation's troubled financial system, according to a bill unveiled by lawmakers on Sunday.

House Speaker Nancy Pelosi, D-Calif., said she hopes the House will take up the bill on Monday. Sen. Majority Leader Harry Reid, D-Nev., said he believes the Senate can move on the legislation by Wednesday.

Pelosi said the provisions added by Congress will protect taxpayers from having to pay for the bailout.

"We sent a message to Wall Street - the party is over," she said at a press conference with Reid and other Democratic leaders from the House and Senate.

The core of the bill is based on Treasury Secretary Henry Paulson's request for authority to purchase troubled assets from financial institutions so banks can resume lending and so the credit markets, now virtually frozen, can begin to operate more normally.

But Democrats and Republicans - concerned about the potential taxpayer cost - have added several conditions and restrictions to protect taxpayers on the down side and give them a chance at some of the potential upside if the companies benefit from the plan. "People have to know that this isn't about a bailout of Wall Street. It's a buy-in so we can turn our economy around," Pelosi said.

Key negotiators for the financial rescue plan will be busy trying to line up votes on Capitol Hill on Sunday to support the accord they reached soon after midnight. House Majority Leader Steny Hoyer, D-Md., told CNN he believes a majority of representatives on both sides of the aisle can and will support the bill.

President Bush, in a statement Sunday evening, said "this is a difficult vote, but with the improvements made to the bill, I am confident Congress will do what is best for our economy by approving this legislation promptly."

On Sunday evening, the House Republican working group, which was stringently opposed to earlier drafts of the plan and offered a counterproposal, indicated it would support the bill, and its members are encouraging other Republicans in the House to do the same.

"Nobody wants to have to support this bill, but it's a bill that we believe will avert the crisis that's out there," House Minority Leader John Boehner, R-Ohio, told reporters.

Key provisions of the bill

Doling the money out: The $700 billion would be disbursed in stages, with $250 billion made available immediately for the Treasury's use. Authority to use the money would expire on Dec. 31, 2009, unless Congress certifies a one-year extension.

Protecting taxpayers: The ultimate cost to the taxpayer is not expected to be near the amount the Treasury invests in the program. That's because the government would buy assets that have underlying value.

If the Treasury pays fair market value - which investors have had a hard time determining - taxpayers stand a chance to break even or even make a profit if those assets throw off income or appreciate in value by the time the government sells them. If it overpays for the assets, the government could be left with a net loss but would get something back on the open market for the assets when it eventually sells them.

If it ends up with a net loss, however, the bill says the president must propose legislation to recoup money from the financial industry if the rescue plan results in net losses to taxpayers five years after the plan is enacted.

In addition, Treasury would be allowed to take ownership stakes in participating companies.

Stemming foreclosures: The bill calls for the government, as an owner of a large number of mortgage securities, to exert influence on loan servicers to modify more troubled loans.

In cases where the government buys troubled mortgage loans directly from banks, it can adjust them more easily.

Limiting executive pay: Curbs would be placed on the compensation of executives at companies that sell mortgage assets to Treasury. Among them, companies that participate will not be able to deduct the salary they pay to executives above $500,000.

They also will not be allowed to write new contracts that allow for "golden parachutes" for their top 5 executives if they are fired or the company goes belly up. But the executives' current contracts, which may include golden parachutes, would still stand.

Overseeing the program: The bill would establish two oversight boards.

The Financial Stability Oversight Board would be charged with ensuring the policies implemented protect taxpayers and are in the economic interests of the United States. It will include the Federal Reserve chairman, the Securities and Exchange Commission chairman, the Federal Home Finance Agency director, the Housing and Urban Development secretary and the Treasury secretary.

A congressional oversight panel would be charged with reviewing the state of financial markets, the regulatory system and the Treasury's use of its authority under the rescue plan. Sitting on the panel would be 5 outside experts appointed by House and Senate leaders.

Insuring against losses: Treasury must establish an insurance program - with risk-based premiums paid by the industry - to guarantee companies' troubled assets, including mortgage-backed securities, purchased before March 14, 2008.

The amount the Treasury would spend to cover losses minus company-paid premiums would come out of the $700 billion the Treasury is allowed to use for the rescue plan.

Far-reaching program

Paulson first announced the administration would seek an economic bailout plan on Sept. 18, after meeting with key lawmakers in the House and Senate - a meeting that left lawmakers looking ashen when they spoke to the press afterwards.

If enacted, the rescue plan would be the most dramatic and extensive government intervention in the economy since the Great Depression. President Bush on Sept. 24 gave a prime-time address to the nation in which he urged lawmakers to pass his plan and warned that the "entire economy is in danger."

The aim of the rescue is to unfreeze the credit markets - short-term lending among banks and corporations. The core of the problem is bad real estate loans that have led to record foreclosures when the housing bubble burst and home prices declined.

In the past two weeks, the banking world and Wall Street have been reordered by a wave of collapses and corporate mergers. The most recent development was the seizure by federal regulators on Thursday night of Washington Mutual, once the nation's largest thrift and a major mortgage lender.

The chill of the credit freeze has been felt far beyond Wall Street, as well. Businesses large and small have seen the cost of borrowing spike higher.

At the same time, the scale of the administration's plan - and the quick pace of the debate over it - has given pause to many Americans and lawmakers worried about its potential cost to taxpayers.

"We begin with a very important task, a task to stabilize the markets, to protect all Americans - and do it in a way that protects the taxpayer to the maximum extent possible," Paulson said early Sunday morning.

CNN's Jessica Yellin and Deirdre Walsh and CNNMoney.com's Chris Isidore and Tami Luhby contributed to this report.

An earlier version of this article incorrectly reported that Congress had publicly released a draft bill that CNN obtained.  


Where things stand
Golden parachutes here to stay

Credit freeze and your paycheck

NEW YORK (CNNMoney.com) -- Is it even harder now for businesses to get credit from banks? No question.

Does that mean that the American economy will crumble within weeks if the government's $700 billion bailout of Wall Street doesn't pass? No telling.

In the wake of last week's demise of Lehman Brothers and last-minute government bailout of American International Group, the credit markets have all but frozen. What this means for businesses is that they are having a tougher time just getting funding even for their day-to-day operations, never mind securing loans for expansion projects.

While the credit crunch is more than a year old already, two things have changed in recent weeks. First, investors have cut off a major financing source of large corporations by shying away from buying their commercial paper, or ultra short-term debt.

Also, since banks are now holding onto their money even more, they are either not extending lines of credit to companies or are instituting more onerous terms. Businesses of all sizes depend on this funding to buy supplies and inventory, make payroll and extend credit to customers while waiting for payments to come in.

Most businesses don't keep much cash on hand. They rely on banks' lines of credit to cover them until they get paid by their customers.

What does that mean for companies and their employees? Economists are divided, with some predicting dire consequences and others saying most can weather the financial storm for now.

Can't live without credit

If businesses can't access funding on reasonable terms, they will likely either raise prices or curtail their operations or both, said Ken Goldstein, economist with The Conference Board, a business research organization. This could send the economy into a tailspin as everyone from the corner bagel shop to the local hospital to the largest manufacturer suffers.

"If they're lucky they get the money, but at a much higher price, which they then pass on to you and me," said Goldstein, adding the economy could start crumbling within weeks under that scenario. "If they don't get the money, they might have to close their doors."

For each business that can't get funding, the impact is felt by many, experts said. The company may curtail credit to its customers, forcing them to pay more cash up front. It won't buy as much from suppliers or invest in upgrading its operations. And it may have to cut its workforce, or at least postpone expanding it.

Both struggling and growing companies feel the squeeze.

"Bank capital is the lubricant that allow them to run their operations," said Amiyatosh Purnanandam, assistant professor of finance at the University of Michigan. "Even a profitable company can't undertake projects because it has no money."

Demise not imminent

Other experts, however, say that most companies can get by for the time being. Credit lines, they point out, usually last for at least a year so banks can't start pulling them willy-nilly unless the terms are broken. And business can better survive a credit squeeze than a major downturn in consumer spending, which has yet to materialize.

"It's not the disaster they are making it out to be," said Amir Sufi, assistant professor of finance at the University of Chicago Graduate School of Business.

Some companies, meanwhile, are coming up with inventive ways to circumvent the funding freeze.

Take Drew Greenblatt, president of Marlin Steel Wire Products in Baltimore.

He recently asked his bank to add $175,000 to his line of credit so he could purchase steel for two large customer orders. The bank said he could get the funding, but only if he first put $175,000 into a certificate of deposit.

"We can get the money but the terms are so silly it just doesn't make sense," he said. "It's very frustrating."

So instead, Greenblatt is demanding more cash from customers in advance. Those clients with average credit ratings now have to put down a 50% deposit on their orders, whereas two months ago they didn't have to pay anything upfront.

"We're trying to make sure what's happening in the credit markets doesn't impact us," Greenblatt said. "We will be able to ratchet up sales and not have to deal with the bank." 


Fed pumps out more dollars

Hopes grow for emergency rate cut

NEW YORK (CNNMoney.com) -- The Federal Reserve could be prompted to make an emergency interest rate cut in the next few days in an attempt to boost confidence in the battered banking sector.

The central bank could even move as soon as Tuesday to cut its fed funds rate, a key overnight lending rate, by at least a quarter percentage point, according to interest rate futures for September listed on the Chicago Board of Trade.

The Fed's next scheduled meeting to discuss interest rates is a two-day session that ends on October 29.

Even though some think an emergency rate cut may have only a limited impact on the economy, it may be necessary to boost investor and consumer confidence.

"What makes it so urgent and crucial is the psychological lift it would provide," said Bernard Baumohl, executive director of the Economic Outlook Group, a Princeton, N.J. research firm. "At this point in time there's a crisis of confidence in the financial sector and on Main Street."

Still, many say the main problem facing the economy the last few weeks is not that it's expensive to get a loan but that banks are growing increasingly unwilling to extend credit.

In just the past three weeks, the federal government seized control of troubled mortgage finance firms Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), Lehman Brothers filed for bankruptcy and Merrill Lynch (MER, Fortune 500) was forced to sell itself to Bank of America (BAC, Fortune 500).

There also was a government bailout of insurance giant American International Group (AIG, Fortune 500) and the failure of Washington Mutual (WM, Fortune 500), the nation's largest savings and loan Thursday night.

That tsunami of bad news left banks and Wall Street firms hoarding their cash due to fears of what's next, analysts said.

Because of this problem, Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson have been pushing for a $700 billion bailout of Wall Street, a plan that would have the government buy mortgage-backed securities now dragging down the balance sheets and earnings of financial firms.

Congressional negotiators were trying to reach an agreement on the controversial plan Friday and proponents hope a deal could be announced this weekend.

With that in mind, some say the Fed may announce an emergency rate cut at the same time a bailout deal is announced.

"I think Bernanke would have done it by now if he wasn't trying to keep the pressure on Congress," said Kevin Giddis, managing director and head of research at Morgan Keegan. "I think the Fed will feel compelled to put a big glob of ice cream on top of the bailout cake. And I think piling on is the right thing to do right now."

The Fed last made an emergency cut when it lowered rates by three-quarters of a percentage point on January 21 in response to financial market turmoil. It cut rates again by a half-point cut at its regularly-scheduled Jan. 30 meeting.

The central bank cut rates again in March and April and has left rates unchanged at 2% at its last three meetings.

On the day of the Fed's last meeting on Sept. 16, investors were actually predicting a cut then. But the central bank chose to leave rates alone, citing continued concerns about inflation as well as the volatile financial markets.

Higher interest rates tend to add to inflation pressures. For this reason, some Fed watchers say the Fed will try to hold off making any rate moves until at least the next meeting in order to see if credit markets can start functioning again without an additional cut.

After all, a rate cut isn't without risks. It could cause the dollar to lose value, which in turn could spark a new rally in oil prices.

"I would doubt [the Fed] will make an emergency cut, although I wouldn't rule it out," said Lyle Gramley, a former Fed governor now with The Stanford Group. "A cut is not going to make credit more available. Unless the markets begin to function more normally, it won't do much good for the Fed to lower rates anyway."

Gramley adds that there are some members of the Fed's rate-setting committee who strongly opposed the rate cuts earlier this year.

Dallas Fed President Richard Fisher, who was against most of the rate cuts and actually voted for a rate hike at the June and August meetings, said in speech Thursday that low interest rates at the start of the decade are at least partly responsible for the problems now facing Wall Street.

The Fed cut rates to 1% in June 2003 and it held them at level for a year, which helped feed the loose mortgage lending practices and housing bubble that are generally seen as the cause of the current crisis, Fisher said.

"In my book, rates held too low, too long during the previous Fed regime were an accomplice to that reckless behavior," he said.

Fisher also cites the risks of inflation, even if oil and gasoline prices have retreated from their highs of earlier this year. But many economists argue that with the slowdown spreading across the globe, there will be little inflation pressure going forward and little downside for the Fed to cut rates.

Some say the dollar could even rally after a rate cut since it may restore faith in the financial sector among global investors. Rate cuts could also help to improve earnings for many battered banks.

So if the Fed is seriously considering a rate cut as a way to respond to the current crisis, there's no point in holding off until its next meeting, which is more than a month away.

"I don't see them waiting until [October] 29th if they're going to do something," said John Silvia, chief economist for Wachovia. "What the hell are you going to keep the powder dry for?"  


Rate cut possible on Wall Street fallout

SEC scraps bank oversight program

WASHINGTON (AP) -- The Securities and Exchange Commission said Friday it was ending a program of voluntary oversight for Wall Street investment banks that its chairman said clearly has not worked.

It was the latest shift in the regulatory landscape stemming from the financial crisis that has gripped the markets and thrown Washington into fevered negotiations over a $700 billion bailout plan.

SEC Chairman Christopher Cox announced the agency's decision to end the program under which SEC examiners inspected the five biggest Wall Street banks: Goldman Sachs (GS, Fortune 500), Lehman Brothers (LEH, Fortune 500), Merrill Lynch, Morgan Stanley (MS, Fortune 500) and Bear Stearns Cos.

The financial upheaval of the last six months has "made it absolutely clear that voluntary regulation does not work" for the bank supervision program, Cox said in a statement. The program "was fundamentally flawed from the beginning, because investment banks could opt in or out of supervision voluntarily," he said.

The SEC inspector general, meanwhile, found that the agency's oversight of Bear Stearns - which nearly collapsed into bankruptcy in March and was purchased by rival JPMorgan Chase (JPM, Fortune 500) with a $29 billion federal backstop - and the other four banks was lacking.

The SEC's oversight of the firms "should be improved" and the guidelines covering their capital and liquidity requirements should be reevaluated, according to the report by Inspector General H. David Kotz made public Friday.

Cox said the report "validates and echoes" the concerns he has expressed to Congress. The weakness of the supervision program stems from the lack of specific legal authority for the SEC or other agencies to act as regulator of big investment-bank holding companies, he said.

In recent days, Lehman Brothers buckled under bad mortgage debt and filed the biggest bankruptcy in U.S. history, and Merrill Lynch agreed to sell itself to Bank of America Corp (BAC, Fortune 500).

That left only two independent investment banks standing on Wall Street - Goldman Sachs and Morgan Stanley - and they won approval from the Federal Reserve last week to change their status to bank holding companies in order to stay in business.

The seismic regulatory shift allows the two firms to create commercial banks that can take deposits, thereby bolstering their resources. It also puts them squarely under the regulatory jurisdiction of the Fed.

Earlier in the year, Cox told Congress he wanted the SEC to supervise big investment banks at the level of their parent holding companies. Fed officials said the prevailing system, in which the central bank is the primary overseer of those firms, generally works well.

The Bush administration has proposed giving new powers to the Fed to oversee financial institutions and supplanting the SEC as primary supervisor of Wall Street investment firms. That change could only come through legislation - something that will have to wait until after the presidential election and the installation of a new Congress next year. 


This isn’t Armageddon
Fed pumps out more dollars

Gas prices fall for 10th straight day

NEW YORK (CNNMoney.com) -- Gas prices fell for their 10th straight day, dropping almost 19 cents during the period, according to a nationwide survey of credit card swipes at gas stations.

The average price of unleaded regular fell by 1.6 cents to $3.667 a gallon on Saturday, from $3.683 a gallon, according to survey results from the motorist group AAA.

Gone are the high prices that followed Hurricanes Ike and Gustav weeks ago. But prices are slightly higher than a month ago, when the national average for a gallon of unleaded was $3.660. They are 30% higher than a year ago, when the average was $2.805.

The record high was on July 17, when the nationwide average for gas prices was $4.114 a gallon.

For now, Hawaii and Alaska are the only two states where gas costs more than $4 a gallon. In Alaska on Friday, the statewide average for unleaded was $4.284 a gallon, according to AAA, and the average was $4.262 in Hawaii.

The cheapest gas was in New Jersey, where the average was $3.394 for a gallon, and in Oklahoma, at $3.370 a gallon. 


Gas prices sink 5 cents in 2 days

Gas: 10% down from July high

NEW YORK (CNNMoney.com) -- Gas prices dropped for the ninth day in a row, bringing the total decline to nearly 17 cents over that time period, according to a nationwide survey of credit card swipes at gasoline stations.

The average price of unleaded regular dropped a further 1.7 cents to $3.683 a gallon, from $3.70 a gallon, according to the survey released Friday by motorist group AAA.

Prices are sharply lower from the high levels seen mid-summer and are just 3 cents shy of pre-Ike levels of $3.652 a gallon. Furthermore, gas is now selling for about 43 cents less than the record high price of $4.114 a gallon set on July 17. That remains to be roughly a 10% decline.

Gas prices headed higher following the devastation left behind by hurricanes Ike and Gustav. With the summer season quickly becoming a distant memory, the downward trend may continue. However, hurricane season is only halfway done, so a big storm could quickly change the landscape.

Prices have stayed below the key $4 level for some time now, but they still remain higher from a year ago, when gas was selling for less than $3 a gallon.

Current prices are about 87 cents, or 31%, higher from a year earlier at this time, when gas was selling for $2.81 a gallon.

Prices for gasoline also tend to follow oil prices, which had been moving lower since mid-July amid weakening demand. In fact, crude prices have dropped some 38% from their record settlement of $145.29 a barrel nearly two months ago.

Prices temporarily reversed course on Monday, posting the biggest one-day dollar gain ever. By Tuesday and Wednesday, the euphoria gave way to more somber trading.

Prices edged higher on Thursday as worries that the government's massive $700 billion bailout plan could be in jeopardy and subsequently cut into demand - which had already been a top worry. Crude prices were down $2.50 a barrel to $105.52 early Friday.

Meanwhile, only two states continue to report gas prices above $4 a gallon: Alaska and Hawaii.

Alaska continues to be the state with the most expensive gas prices, at $4.277 a gallon. Oklahoma unseated New Jersey for the second day as the state with the cheapest gas prices, at $3.389 a gallon, according to AAA's Web site.  


Gas: Down 15 cents in 8 days

Wachovia-Citi talking: Report

NEW YORK (CNNMoney.com) -- Wachovia is reportedly mulling a deal with another large bank, including Citigroup and Spain's Banco Santander, according to reports published Friday afternoon.

Citing people familiar with the situation, both the New York Times and the Wall Street Journal reported that the Charlotte, N.C.-based Wachovia was in preliminary talks with Citigroup (C, Fortune 500). The two papers also mentioned Santander (STD) and West Coast banking giant Wells Fargo (WFC, Fortune 500) as other potential suitors.

Spokespeople for Citigroup, Wachovia and Wells Fargo declined to comment. A representative for Santander was not immediately available to comment.

The news, however, failed to prop up Wachovia (WB, Fortune 500) shares in after-hours trading following a particularly tough session in which shares of the Charlotte, N.C.-based bank lost nearly a third of their value.

This isn't the first time that Wachovia was mentioned entering tie-up talks either. A little over a week ago, there was rampant speculation that Morgan Stanley and Wachovia were reportedly discussing a merger.

A deal between the two firms looks increasingly unlikely though after Morgan Stanley (MS, Fortune 500) agreed to sell up to a fifth of the company to Mitsubishi UFJ Financial Group (MUFG), one of Japan's largest banks, earlier this week.

Following a string of high-profile collapse of banks in recent weeks including a bankruptcy by Lehman Brothers and Washington Mutual's (WM, Fortune 500) failure and subsequent purchase by JPMorgan Chase (JPM, Fortune 500) late Thursday, there has been increasing speculation that Wachovia could be the next one to go.

The company reported losses during the past two quarters due in large part to its exposure to U.S. mortgage market.

Some analysts have cited the company's ill-timed 2006 acquisition of the California mortgage lender Golden West Financial Corp. for its current woes.

A Wachovia representative stressed in a statement earlier Friday that it has a "strong retail franchise and large and stable deposit base," adding that it was working to strengthen both its capital and liquidity.

Were Wachovia to enter a deal, it would mark yet another big shake up of the nation's banking industry, which has undergone a dramatic transformation in the past two weeks including Lehman's demise, the acquisition of Merrill Lynch by Bank of America (BAC, Fortune 500) and the government's takeover of AIG (AIG, Fortune 500). 


Subprime crisis: A timeline
Treasury offers mortgage takeover FAQ

Fed pumps out more dollars

NEW YORK (CNNMoney.com) -- The Federal Reserve expanded deals early Friday morning with two of its counterparts in Europe in order to make an extra $13 billion available to banks there, after reporting increased lending to U.S. banks and Wall Street firms.

The deal will have the Fed provide $10 billion to the European Central Bank and $3 billion to the Swiss National Bank. In return, it will receive a reciprocal amount of foreign currency from each country.

The $13 billion comes on top of the $277 billion in such swap deals that had previously been announced, including $110 billion with the ECB and $27 billion with the Swiss National Bank.

Friday's action helps provide dollars to foreign banks that needed the U.S. currency to transact business but had been unable to access the Fed directly the way U.S. banks can.

The three central banks said the latest action is designed to help banks that needed access to the cash to close transactions at the end of the third quarter, which concludes on Tuesday.

The Fed has been taking steps to pump dollars into the U.S. financial system as well, lending out more than $140 billion over the course of the last week.

Figures released Thursday showed that borrowing by Wall Street securities firms totaled $105.7 billion as of Wednesday, up from $59.8 billion a week earlier.

In addition, under an emergency program unveiled by the banks last week, commercial banks borrowed $72.7 billion through Wednesday in order to buy commercial paper from money-market mutual funds.

And loans through the traditional discount window rose to $39.3 billion, up $5.9 billion from a week earlier. Other credit extensions jumped by $16 billion to $44 billion.

The moves come as banks and Wall Street firms have become reluctant to lend money to each other, or to customers. There are reports of banks hoarding cash out of concerns about their own future as well as uncertainty about the financial condition of other institutions.

That resulting freezing of credit and financial markets has prompted the Treasury Department and Fed to push for a $700 billion bailout package that would have the government buy mortgage-backed securities whose value has plunged in the face of sliding home prices and climbing foreclosures.

Congressional negotiators were reportedly close to a deal Thursday to win bipartisan approval of the bailout package but objections from House Republicans have thrown the status of those talks into doubt.

The announcement also came the day after Washington Mutual was taken over by the Federal Deposit Insurance Corp., making it the largest bank failure in U.S. history. The nation's largest thrift was then sold to JPMorgan Chase (JPM, Fortune 500). 


Central banks pump up the dollars

This isn't Armageddon

NEW YORK (Fortune) -- Here's what's wrong with most of what we're hearing and reading on the financial crisis: It forgets that people aren't potted plants.

Whether they're Wall Street executives, homeowners in a down market, entrepreneurs facing a credit squeeze, or politicians facing re-election, people don't just sit there and allow events to beat them up. Instead, they anticipate and they respond.

I don't claim special powers to know what how today's crisis will turn out-or what the consequences will be of the actions that attempt to solve that crisis. But I know for sure that some of what we're reading and hearing doesn't reflect clear thinking. Here are three particularly important instances:

The economy: The most troubling element of what we're reading and hearing is the constant references to the Great Depression. The error is in forgetting that all real-world situations are dynamic. The Depression itself was a dynamic sequence. It wouldn't have happened if the Fed hadn't insanely tightened credit in response to the stock market crash, rather than the correct policy of easing interest rates. And it wouldn't have happened if Congress hadn't clamped down on trade through the Smoot-Hawley bill.

Those things aren't happening this time. Instead, Congress is apparently on the road to unfreezing the credit markets. More important, America is a nation of 300 million resourceful people who will find opportunities in the current situation that you and I cannot imagine.

After President Bush's speech on Wednesday evening, Brian Williams on NBC called this "the worst financial disaster in more than a generation." No, it is not that. A crisis, yes; a disaster, no. Of course, it could still become one. But for now, calling it a disaster is a dramatic overreaction.

CEO pay: Congress seems determined to make CEOs of financial firms suffer, and who can blame it? If taxpayers are going to bail out the firms at the root of the crisis, then the political imperative is that the leaders of those firms must be seen to pay a price. Fine. Just remember that CEOs aren't potted plants.

The last time Congress tried to crack down on CEO pay was in 1993, when it amended the tax code (section 162(m), in case you care) so that pay above $1 million was not tax deductible to the employer if it wasn't performance-based. No problem, said companies - we'll just cap salary at $1 million and ladle on stock options, which by definition are performance-based, in staggering amounts. There followed the greatest bull market in history, and because of all those options CEOs made far more money than they ever would have if 162(m) hadn't happened.

How will CEOs turn the new pay restrictions to their advantage? I don't know. But you just watch.

"The end of Wall Street": The premise is that seven months ago there were five major investment banks, and now there are none. Bear Stearns and Lehman Brothers failed; Merrill Lynch (MER, Fortune 500) got sold to a commercial bank, Bank of America (BAC, Fortune 500); and Goldman Sachs (GS, Fortune 500) and Morgan Stanley (MS, Fortune 500) are converting to commercial bank holding companies. Thus, no more investment banks and the end of Wall Street as we know it.

I don't buy it. Have the advantages of the independent investment bank model forever vanished? Of course not. Will the attractions of that model - avoiding the regulations and capital requirements of commercial banks - again become apparent as the current crisis fades? Certainly. Will entrepreneurs - mostly bankers fired from the former Big Five - rush to start new firms, adapting ingeniously to the new rules, as economic conditions eventually become amenable? Of course they will.

In the rush of recent events it's hard to think about the world five years from now. But that world will come, and when it does, we'll look back and realize that what just happened wasn't the end of Wall Street. Rather it was the extinction of the dinosaurs. New species are on the way. I promise you they're in gestation right now.

I certainly don't know what's going to happen. But I know for sure that it's going to be shaped by millions of players in an infinitely complex global economy. And I know that they wield ingenuity and creativity on a scale that none of us individually can imagine. You never know whether the result will be for the better, but our system seems to possess a self-correcting impulse. Most important, as we try to divine what will happen next, let's not forget that through the tumult, no one sits still. 


Subprime crisis: A timeline
Will it work?

Gas: Down 15 cents in 8 days

NEW YORK (CNNMoney.com) -- Gas prices extended their decline, falling for the eighth day in a row, according to a nationwide survey of credit card swipes at gasoline stations.

The average price of unleaded regular dropped 1.5 cents to $3.70 a gallon, from $3.715 a gallon, according to the survey released Thursday by motorist group AAA.

Prices have come way down from the high levels seen mid-summer and are nearing pre-Ike levels of $3.652 a gallon. Gas is now selling for about 41 cents less than the record high price of $4.114 a gallon set on July 17. That's roughly a 10% decline.

Gas prices on the rise following the devastation left behind by hurricanes Ike and Gustav. The summer driving season is over, which could help prices continue to trend downward, but hurricane season is only half over so any big storm could throw that trend in reverse.

Prices have dropped 15 cents over the past eight days and have stayed below the key $4 level for some time now, but they still remain higher from a year ago, when gas was selling for less than $3 a gallon.

Current prices are about 89 cents, or 31%, higher from a year earlier at this time, when gas was selling for $2.81 a gallon. And prices are just roughly 6 cents shy of levels seen before Ike slammed through the Gulf of Mexico.

Prices for gasoline also tend to follow oil prices, which had been moving lower since mid-July amid weakening demand. In fact, crude prices have dropped some 28% from their record settlement of $145.29 a barrel nearly two months ago.

Prices temporarily reversed course on Monday, posting the biggest one-day dollar gain ever. But by Tuesday and Wednesday, the euphoria gave way to more somber trading.

Crude prices were down about $1.63 a barrel to the $104.10 level early Wednesday. Meanwhile, only two states continue to report gas prices above $4 a gallon: Alaska and Hawaii.

Alaska continues to be the state with the most expensive gas prices, at $4.30 a gallon. Oklahoma unseated New Jersey as the state with the cheapest gas prices, at $3.411 a gallon, according to AAA's Web site. Prices in New Jersey, which had recorded the lowest prices for nearly a month, clocked in at $3.424 a gallon. 


Gas prices sink 5 cents in 2 days

Don't sweat (or cheer) lifting drill ban

NEW YORK (CNNMoney.com) -- The lapse of the federal ban on offshore oil drilling doesn't mean sunbathers will have to contend with drill rigs near the beach next summer, nor does it mean a new era of energy independence is on the horizon.

Even though the House voted to let the ban on offshore drilling expire at the end of September, and the Senate looks likely follow suit, it will still take years before even the first lease is granted. And in the meantime, a new President could reinstate the ban with the stroke of a pen.

"If Congress doesn't back track, it will increase access, it will increase supply, and it will be good for the consumer," said Judy Penniman, a spokesperson for American Petroleum Institute. "But it's just a beginning."

"Nothing's going to change short-term off our coasts," said Athan Manuel, director of lands protection for the Sierra Club.

That's because the government agency the regulates offshore drilling, the Mineral Management Service, says it needs until at least the middle of 2011 to conduct the necessary environmental reviews and public hearings before it can issue any permits in areas currently closed to drilling - which include almost every mile off the east and west coast.

Prior to this summer, there were two bans restricting drilling in most federal waters off the U.S. coast, which run from 3 to 200 miles offshore. The bans were enacted largely due to environmental concerns following big oil spills in the late 1960s.

Even before the likely lapse of the drilling ban, the government was preparing to issue offshore permits.

President Bush lifted the executive ban earlier this year. When that happened, the president directed MMS to start making plans to issue leases, should Congress lift its ban.

"That will give the next administration some options," said Nic Pardi, a spokesman for MMS.

Environmentalists are concernedabout the ban lapsing, noting the potential for spills that could spoil economically vibrant coastlines and saying the whole debate has distracted the nation from what it really should be doing - conserving energy and finding alternatives.

But they expect more restrictions once a new president takes office.

"Even John McCain doesn't want drilling 3 miles from shore," said The Sierra Club's Manuel.

Lifting the ban will be a defeat for Democrats. For the last six months they have fought an onslaught of Republican attempts to lift the ban in the face of rising gasoline prices and with public support for offshore drilling.

The Democrats have largely echoed the arguments of environmentalists - that drilling is distraction from the real problem of inefficiency and fossil fuel addiction. They also note that most offshore oil and gas is already available to oil companies, and any additional supplies will take decades to bring online and be too small to have any meaningful impact on oil prices.

The White House made it clear any new drilling provision was a non-starter," Drew Hammill, a spokesman for house speaker Nancy Pelosi, said in a statement. "The future resolution of offshore drilling will have to be addressed with a new President."

In other energy news on the Hill, Senate Democrats fighting for tax breaks for renewable energy won a significant victory.

The Senate voted to renew $17 billion in renewable energy tax credits. The credits will extend to wind projects and most other renewable energy projects for a one-year period, and solar projects for an eight year period. The House is likely to pass the measure.

Renewable energy proponents had said a multi-year extension was important to boost investment in the sector.  


House passes drilling bill
House vote expected on oil drilling

Bailout cost unknown - CBO

NEW YORK (CNNMoney.com) -- Average Americans aren't the only ones who think they don't have enough information to assess the Treasury's proposal to buy up to $700 billion of troubled mortgage assets.

Even one of the country's top bean counters can't say with certainty how much the plan will ultimately cost taxpayers, if anything.

The Congressional Budget Office says that it is "impossible" to estimate the bottom line cost of the Treasury's bailout proposal given its lack of specificity.

However, in testimony before the House Budget Committee on Wednesday, CBO Director Peter Orszag said that the CBO expects the net cost to be "substantially less" than the $700 billion requested by the Bush administration.

"It seems implausible that the U.S. would lose every cent on the dollar for the purchases it made," Orszag said.

That's because under the proposed program, which is being debated feverishly in Congress, Uncle Sam would buy assets that have underlying value.

If it overpays, the government could be left with a net loss. If he pays fair market value - which investors have had a hard time determining - taxpayers stand a chance to break even or make a profit if those assets throw off income or appreciate in value by the time the government sells them.

Lawmakers on the committee expressed concern over whether the the program would drive up the cost of federal government borrowing - a particularly important issue since the federal budget deficit this year is expected to reach$407 billion and climb higher next year.

The government borrows a lot of the money the country spends. And if buyers of U.S. debt become concerned Uncle Sam may be under strain to repay them, they may demand a higher interest rate when they buy Treasurys.

Orszag said rates could go up if the market suspects or is uncertain about whether the Treasury overpaid for assets in the bailout.

When asked what the ramifications might be if lawmakers reduced or increased the amount of money the Treasury could invest in this venture, Orszag said, "it's in no small part a confidence game." That is, the market has been led to believe the country will put $700 billion into this effort, so it can be risky to change those expectations at the last minute.

And what if lawmakers don't pass a bailout plan?

"Being able to obtain credit is crucial for households and firms," Orszag said. If sources for liquidity dry up - and, he said, there are already "ominous signs pf credit difficulties are accumulating" - "we'll have severe turmoil in the real economy."

For those who wonder how this turmoil can affect them, Orszag said, "It will come home in the form of your company being unable to fund its operations and the rates you'll pay for a mortgage and car loan. Those kinds of effects come sometime after the financial market turmoil begins, but they do come."

For the economy as a whole, "you'd have a financial meltdown and it would cause very serious economic dislocation on the order of Great Depression effects," he said.

Put simply, Orszag said, "it would be a very bad situation." 


Where things stand

Where things stand

NEW YORK (CNNMoney.com) -- As the Bush administration continued to push Congress to accept its rescue proposal, the president geared up for a prime-time address to the nation Wednesday night - his biggest push yet for the proposed $700 billion bailout of the U.S. financial system.

Earlier in the day, Congressional Budget Office Director Peter Orszag testified before the House Budget Committee that the bottom-line impact of the Treasury's proposal on the federal budget cannot be properly estimated, but the net cost will be "substantially less" than the $700 billion requested by the Bush administration.

At the same time, Federal Reserve chairman Ben Bernanke testified before the Joint Economic Committee. He received support from lawmakers for taking action to address the crisis but resistance about parts of the Treasury plan.

Later in the day, Bernanke and Treasury Secretary Henry Paulson testified before the House Financial Services Committee, a day after the pair defended the Bush administration's plan in front of the Senate Banking Committee.

As new Democratic proposals have shifted the terms of the debate and some conservative Republicans have raised concern about the potential cost, the battle over the bailout is just beginning.

The Bush administration's plan would allow the Treasury to buy up troubled assets from financial institutions. The aim is for the government to buy the assets at a discount, hold onto them and then sell them for a profit.

The Democrats are drafting several add-ons: They want the government to get an equity stake in the companies it helps; more assistance for those at risk of foreclosure; more oversight of the program; and curbs on compensation of executives of participating companies.

Here's where the debate stands:

The plan: Though the details are still being hammered out, the Treasury says it will buy up troubled assets of American banks and institutions doing business in the United States.

Private money managers would oversee the assets while they are in the government's possession.

What remains to be seen is how the Treasury Department will structure the purchases and how much they'll pay for the assets.

One purchasing method that Treasury has suggested is a reverse auction to set the discount at which the assets would be picked up. The goal is to buy at a discount to face value. The primary target is mortgage-backed securities that have seen their value plunge due to rising foreclosures and a prolonged slide in home values, but debt ties to auto loans and credit cards may also be included.

The Treasury plan allows the government to buy the assets for two years after the plan is enacted.

A Democratic alternative proposed by Banking Committee Chairman Christopher Dodd, D-Conn., would terminate Treasury's special authority to buy up troubled assets by Dec. 31, 2009.

The Treasury thinks that by taking problem assets away from banks, financial institutions will be able to shore up their balance sheets, allowing them to lend to consumers and other banks again.

Help for housing markets: Many experts are skeptical of the plan, especially in its indirect ability to help homeowners.

Accordingly, the Senate Democrats' proposal would also require the government to include in the bailout proposal a separate systematic way to keep people in their homes.

Sen. Dodd calls for a change to federal law so that bankruptcy judges can modify mortgages in default. Under current law, judges may only modify loans on second homes.

Both of the Democratic proposals also pushed for foreclosure prevention through loan modifications and use of the HOPE for Homeowners Program on the mortgages the government will buy in the bailout.

The cost: The Treasury's proposal calls for government authorization to purchase as much as $700 billion of bad loans.

No one yet knows how much taxpayers will have to pay in the end, because the government plans on holding onto the assets until the markets improve. The Treasury then plans to sell those loans with the hope that the government might even make a profit.

In testimony before the House Budget Committee on Wednesday, CBO Director Peter Orszag said the net cost to taxpayers will be "substantially less" than the $700 billion headline number, though he said an estimate was impossible.

"It seems implausible that the U.S. would lose every cent on the dollar for the purchases it made," Orszag said.

Orszag added that the Federal Reserve may raise interest rates if the market suspects that the Treasury overpaid for assets in the bailout.

As part of the program, the Bush administration wants Congress to increase the nation's debt ceiling. Currently, it's set to rise to $10.6 trillion for fiscal year 2009, which starts Oct. 1. The proposal calls for the limit to be increased to $11.3 trillion.

House Financial Services Chairman Barney Frank, D-Mass, has advocated paying for the bailout by raising taxes on people with income exceeding $1 million a year.

Ranking member of the Senate Banking Committee Richard Shelby, R-Ala., also said taxpayers will have to help foot some of the bill.

Democratic add-ons: Democrats have expressed concern about the lack of oversight in the Treasury's proposal. Both Sen. Dodd's and Rep. Frank's plans would create an oversight board for the Treasury program as well as regular updates on the plan's progress.

Sen. Dodd would require the government to receive an ownership stake in the companies it helps. That idea would require companies who sell assets to the Treasury to give the government shares in the company.

Curbs on executive pay were also proposed in the Dodd plan but not in the Frank plan. Dodd's proposal would set standards on compensation for big wigs from institutions that take advantage of the bailout, including limits on incentives and severance packages.

Market reaction: The bailout was first announced last Thursday, and investors cheered the plan Friday, sending stocks soaring. But as it became clear that the plan would face many hurdles before enactment, stocks have sold off.

Other markets have been extremely volatile over concerns with the amount of debt the government would have to issue for the bailout. The dollar has been under pressure.

-- CNNMoney.com senior writers Jeanne Sahadi and Tami Luhby contributed to this report. 


Lawmakers promise fast action

Bailout: No cure for recession

NEW YORK (CNNMoney.com) -- Even if the Bush administration's $700 billion bailout works, the United States still faces the longest and most severe economic stretch since the Great Depression, according to one economist.

"The recession train has already left the station," said Nouriel Roubini, professor of economics at NYU's Stern School of Business during a conference call Wednesday. "What this plan can avoid is a Japan-like, L-shaped recession," where the economy sinks and stays sunk, "that could last a decade or more."

He said a well-implemented plan could limit the heavy bleeding to 18-months.

To do it right, according to Roubini, the toxic credit held by banks would have to be bought up and taken off balance sheets so banks can start to lend again.

For the government to make that kind of investment, he added, it had to get something in return. Roubini suggested that should be preferred shares in the companies that later would convert to common stock.

Roubini also had a solution for the housing market: Reduce mortgage balances to market prices and refinance them to lower mortgage payments.

He pointed out that home prices are down 25% from their highs already and will probably fall another 15%. That would put a good 40% of all mortgage borrowers underwater, owing more on their loans than their homes are worth.

"More people will walk away from their homes," he said. "Even if only one in five walks away, that adds up to a $400 billion loss. If half walk away, it would be a trillion."

The impact of the housing crisis on the larger economy is everywhere. Stock prices are already down 20% from their highs - the definition of a bear market - and will fall another 15% to 20%, according to Roubini.

Consumer spending, which accounts for more than 70% of the national economy, has fallen for three straight months, after being temporarily boosted by stimulus checks.

Home price declines have lowered consumer confidence and removed a source of wealth. Few homeowners can now fund their purchases by tapping their home equity via a home equity loans or cash-out refinances.

"People can't use their homes as ATMs anymore," said Roubini.

Job losses have increased and the unemployment rate hit 6.1% in August, up from 5.7% in July, the highest in five years. Roubini is forecasting it to top out at over 8%, at least.

And mortgage lending problems have migrated into other lending vehicles and will spread further.

Roubini predicted that practically all lending will see increased rates of defaults in the coming months from auto loans to credit cards to commercial real estate loans to municipal bonds.

"We don't just have a subprime mortgage lending system," Roubini said, "we have a subprime financial system."

The next shoe to drop may be thousands of highly leveraged hedge funds, according to Roubini.

As nervous investors cash in, the funds will be forced to liquidate highly leveraged assets at a deep discount, he said, causing the collapse of hundreds of smaller funds that have taken on excessive risk.

Roubini said a massive shake-out of the industry is likely during the next few years.  


Construction spending lowest in 7 years

FDIC chief : Hopes of home loan bailout

WASHINGTON (AP) -- As Congress moves on the financial bailout plan, restructuring of troubled mortgages should be part of the final package, the head of the Federal Deposit Insurance Corp. said Tuesday.

FDIC Chairman Sheila Bair said she hoped that changes on home loans "will be a feature of that."

Under the $700 billion proposed bailout plan, the government could acquire troubled mortgage assets or provide a guaranty for delinquent loans, buying them and removing them from the overall pool of mortgages, Bair suggested.

Mortgage finance giants Fannie Mae and Freddie Mac, taken over earlier this month by the government which is operating them under a conservatorship, bought mortgages from banks and other lenders and guaranteed them in exchange for fees.

"We're highly supportive of Treasury's initiative," Bair said, stressing the need for a restructuring of distressed home loans in a comprehensive, streamlined manner.

Bair was speaking at a Brookings Institution conference on housing. She also reaffirmed that she believes it unlikely that the FDIC would have to use its "wide flexibility" to borrow from the Treasury if needed.

IndyMac failure sets back fund

The failure in July of Pasadena, Calif.-based IndyMac Bank tipped the federal deposit insurance fund - now at around $45.2 billion - below the target minimum level set by Congress, but Bair has said the agency's plan to raise the premiums charged U.S. banks and thrifts to replenish the fund likely will be sufficient.

"I think actually the banking sector is holding up pretty well," Bair said. The recent collapse of major investment banks and the cataclysm on Wall Street has shown that "there is some virtue to regulation. There is some virtue to leverage constraints," she said.

Investment banks have had more lenient guidelines in how highly leveraged they could become, with a much higher ratio of debt to their capital than commercial banks regulated by the FDIC that have access to the deposit safety net.

Referring to Treasury Secretary Henry Paulson and the current tumultuous events, Bair said, "Hank's got a whole lot of other people knocking on his door. I don't want to add to people knocking on his door." 


Problem banks multiply
Big bailout: Where things stand

Senate eyes clean energy tax breaks

WASHINGTON (AP) -- The Senate is taking up a $100 billion tax bill designed to spur renewable energy investment, give tax breaks to businesses and individuals and protect more than 20 million people from the dreaded alternative minimum tax.

The package, which has bipartisan support, is one of the bills Congress must address before it adjourns for the year. It precedes debate this week on a $700 billion plan to bail out failing financial institutions.

Incentives for renewable power

The Senate moves first Tuesday on the alternative energy section of the package. It would provide some $17 billion in incentives to develop and use wind, solar, biomass and other renewables.

It would extend for eight years the investment credit for solar energy and the credit for homeowners buying solar heating equipment, at a cost of $3.2 billion. In addition, it would establish a new credit for plug-in electric drive vehicles, at a cost of $758 million.

A study commissioned by the Solar Energy Industries Association found that the eight-year extension would more than triple investment during that period, to $325 billion, and almost triple employment in the industry, to 440,000 in 2016.

Alternative minimum tax fix

The legislation would also adjust the alternative minimum tax to prevent more than 20 million people from seeing their taxes rise by an average of $2,000. The AMT was enacted in 1969 to catch a very small number of rich people, but was never adjusted for inflation and must be fixed by Congress every year to keep its reach from spreading.

The cost of the AMT patch is more than $60 billion over 10 years. The bill also extends dozens of other targeted tax breaks that expired at the end of last year or are about to expire. The biggest is the $19 billion research and development tax credit. Also renewed are deductions for state and local general sales taxes, higher education costs and teachers' personal expenses.

The legislation also includes more than $8 billion in tax relief for Midwestern states hit by natural disasters this summer and for the recent victims of hurricanes in Texas and Louisiana.

It requires private insurance plans that offer mental health benefits to offer benefits equivalent to those of medical-surgical treatments.

The bill must still go this week to the House, where there is strong recognition of the need to fix the AMT and solid support for the energy incentives and such tax breaks as the R&D credit.

Dems fear ballooning deficit

But there is also a strong sentiment among many House Democrats that it is wrong to provide tax relief without parallel revenue increases to prevent further ballooning of the budget deficit.

The Senate bill offsets the energy tax breaks by tightening the rules by which oil and gas companies pay taxes on income earned overseas. It offsets about $25 billion of the approximately $68 billion in individual, business and disaster tax relief. There is no new revenue to pay for the AMT fix. 


House vote expected on oil drilling

Weakest holiday sales since '02 seen

NEW YORK (CNNMoney.com) -- The nation's retailers could be in for the weakest holiday season in six years as the sluggish economy continues to squeeze household budgets, according to a trade group report issued Tuesday.

The National Retail Federation forecasts that retail sales between November and December will expand 2.2% to $470.4 billion. That's below the ten-year average of 4.4% and the lowest since 2002, when sales rose 1.3%.

"Current financial pressures and a lack of confidence in the economy will force shoppers to be very conservative with their holiday spending," said NRF Chief Economist Rosalind Wells in a statement.

Weakness in the housing market, rising unemployment and lackluster income growth are among the challenges that consumers will face this holiday season, the NRF said.

Additionally, high energy and food costs will continue pinch American consumers. And the crisis in the nation's financial system will erode consumer confidence in the months ahead.

"We expect consumers to be frugal this season and less willing to splurge on discretionary items," Well said.

Given the current outlook, the NRF does not expect the economy to rebound until the second half of next year.

Last year's holiday sales rose 3% (correct), driven largely by gains in the consumer electronics market, NRF said. The forecast was for a 4% increase.

-- An earlier version of this story erroneously reported last year's sales gain. CNNMoney.com regrets the error. 


Consumer Confidence
Retail Sales

New Lincoln penny designs unveiled

NEW YORK (CNNMoney.com) -- For the first time in 50 years, the penny is getting redesigned, with four versions coming next year to commemorate the 200th anniversary of Abraham Lincoln's birth, the U.S. Mint announced Monday.

While the coin will continue to depict Lincoln's likeness on the front, the reverse side will bear one of four new designs, the Mint said.

The designs show milestones in the life of the 16th president: the Kentucky log cabin of his birth, his youth working as an Indiana rail splitter, his service at the State Capitol in Illinois, and his effort to preserve the union during the Civil War as depicted by a half-finished image of the U.S. Capitol dome.

The first of the coins debuts Feb. 12, with the others following in three-month intervals. The release date, besides being Lincoln's birthday, comes a century after the production of the original Lincoln cent in 1909.

The Lincoln cent was the first circulating coin to feature a person's likeness, and also the first to depict a U.S. president.

A Lincoln commemorative silver dollar will also be released in 2009.

"These coins are a tribute to one of our greatest presidents...he believed all men were created equal, and his life was a model for accomplishing through honesty, integrity, loyalty and a lifetime of education," said U.S. Mint director Ed Moy.  


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Americans want bailout - worry over cost

NEW YORK (CNNMoney.com) -- Bail out the financial industry, but don't send me the bill.

That's what a majority of Americans are saying, according to a CNN poll released Monday. The poll showed that people are concerned about the economy, and a majority favor government action to help bail out the struggling financial institutions. But people are concerned that the proposed industry-wide bailout will burden taxpayers.

Of the more than 1,000 Americans surveyed in a national CNN/Opinion Research Corp. poll, 62% said they think in general the government should step in to try to address the problems facing struggling financial institutions. The margin of error was plus or minus 3 percentage points.

But the poll, conducted Sept. 19-21, showed that Americans think the cost of the $700 billion plan being debated in Congress is too high.

Though 55% said they favor the proposed bailout, 65% said it would probably treat taxpayers unfairly.

The drop off in support for the government's actions could stem from the fact that taxpayers may have to foot the bill for all these bailouts. The majority of CNNMoney.com readers voiced similar concerns in a Talkback blog over the weekend.

Still, 88% of 518 respondents said they are concerned or even scared by the tumult in the financial markets.

And 55% supported the government's actions taken so far - such as the $85 billion loan to insurer American International Group (AIG, Fortune 500) and hundreds of billions in backing for mortgage finance giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) and Wall Street brokerage Bear Stearns.

Cost to taxpayers still unclear

Economists say that the cost to the taxpayer is not yet known - and probably won't be close to the headline number.

"For the average person, $700 billion sounds like a whole heck of a lot of money," said John Silvia, chief economist for Wachovia. "It's reasonable to look at that number and be scared about it, but in the end, the Treasury may actually make money from the deal."

That's because the government is proposing to buy up troubled assets that banks don't want, with the intention of selling them later when the market is better.

"There's a chance they could sell them at a decent price," Silvia said.

A necessary action

Furthermore, the cost of doing nothing may be much more severe.

"Because of the hit that capital took, there wasn't any lending going on, which created a lot of complications with people getting mortgages," said Silvia. "If these companies have to write down loans, they're going to make even fewer loans in the future."

Since the markets are all circular and related, failing companies can negatively impact people's ability to get a mortgage, finance a car or even save for retirement.

"A lot of people's IRAs, 401(k)s and pension plans had Fannie and Freddie in it," Silvia added. "And anyone with an S&P 500 index fund has a huge weighting on the financial sector." 


Rescue cost: The big unknown

Democrats push back

NEW YORK (CNNMoney.com) -- Democratic leaders on Capitol Hill said on Sunday that the Bush administration's $700 billion proposal to bail out the financial system lacked necessary safeguards for taxpayers and homeowners.

Democrats want the measure to include independent oversight, homeowner protections and limits on executive compensation, House Speaker Nancy Pelosi, D-Calif., said in a statement early Sunday evening.

"We will not simply hand over a $700 billion blank check to Wall Street and hope for a better outcome," she said.

Pelosi said that Congress will take action on the bailout this week but will act "to insulate Main Street from Wall Street."

Earlier on Sunday, Treasury Secretary Henry Paulson called on Congress to move swiftly.

"We need this to be clean and quick," Paulson said on ABC's "This Week."

Treasury spokespeople were not immediately available for comment on Pelosi's statement.

The legislative proposal is the centerpiece of what would be the most sweeping economic intervention by the government since the Great Depression. (Read the text here.)

Paulson, Federal Reserve Chairman Ben Bernanke and other officials have said in recent days that the lack of easy credit between banks and other financial institutions threatens to inflict serious damage on the economy if not addressed immediately.

The plan would allow the Treasury to buy up mortgage-related assets from American based companies and foreign firms with a big exposure to these illiquid assets. The aim is for the government to buy the securities at a discount, hold onto them and then sell them for a profit.

"What we're doing is first stabilizing the market," Paulson said Sunday morning. "Once we stabilize the market, we need to ask ourselves how did we get here and how do we avoid getting here again."

"We need a lot of reforms, and this is going to be something Congress and the next administration are going to be working on for some time," Paulson added.

Paulson also stressed that the administration has begun discussions with foreign governments to push them to institute similar action, though he stressed that none have made any commitments to do so yet.

Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee, agreed with Paulson that speedy passage of the bill was necessary. "We need to do it quickly," Dodd said on "This Week." "We need to give the Secretary the authority to work."

House Minority Leader John Boehner, R-Ohio, said Sunday that fellow lawmakers should not try to load up the bill with amendments. "This is not a time for people to be playing games - we need to keep it clean and simple."

Experts liken the Treasury's plan to the Home Owners' Loan Corp., put in place in 1933 to stem foreclosures and help refinance defaulting mortgages and boost banks' liquidity.

The mortgage plan is part of an extraordinary effort by the federal government to contain a financial crisis that has forced a major realignment on Wall Street and has started rippling out to Main Street.

In the past week, two of the nation's most venerable investment banks - Lehman Brothers (LEH, Fortune 500) and Merrill Lynch (MER, Fortune 500) - have fallen and the Federal Reserve was forced to lend $85 billion to prevent the sudden collapse of insurance giant American International Group (AIG, Fortune 500).

Meanwhile, mainstay financial institutions are scrambling to raise cash and shore up their books as lending has frozen up and investor confidence has sunk.

"You can't describe how ugly it would look if we don't act," Boehner said.

Working out the details

The bill is being hammered out on Capitol Hill. The House Financial Services Committee has scheduled a Wednesday hearing to debate it.

Among the Democrats advocating that economic stimulus be part of the bailout package was Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee.

"It's kind of hard to tell the average American that we are going to continue to have foreclosures that destabilize neighborhoods and deprive cities of revenue they need, but we're going to buy up the bad paper," Frank said on CBS' "Face the Nation."

Frank advocated higher taxes on people with income exceeding $1 million a year. And the idea that the deficit would force tax increases even made it across party lines.

"When we add an additional trillion dollars to the debt, the burden of the taxpayer, sooner or later there's got to be a reckoning," Sen. Richard Shelby, R-Ala., ranking member on the Senate Banking Committee, told "Face the Nation." "This is the mother of all bailouts."

Protecting the taxpayers

The administration's proposal also requests that Congress authorize an increase to the nation's debt ceiling. Currently, it's set to rise to $10.6 trillion for fiscal year 2009 - which runs from October 2008 through September 2009. But the proposal requests that limit be increased to $11.315 trillion to allow for the purchases of mortgage-backed assets.

The debt limit is a ceiling on how much debt the federal government is allowed to take on. Budget experts say it acts as a break on spending mostly because of political pressure, because lawmakers don't like to vote to raise it. Lawmakers are free to change it if they have reason, however.

Paulson on Sunday acknowledged that the plan involves considerable risk for taxpayers, but said that the Treasury should recoup at least some of what it will spend on this bailout.

"We're talking about hundreds of billions of dollars, but remember this is not an expenditure, this is money that is being used to purchase illiquid mortgage assets that are very difficult to value," Paulson said on NBC's "Meet the Press."

"They will be held [by the Treasury] and they will be resold at some time. And so we can't determine what the cost is today," Paulson said. "That's going to be based on how quickly the economy recovers, what happens in the mortgage market."  


Big bailout: Where things stand

Gas prices: Down 10 cents in 4 days

NEW YORK (CNNMoney.com) -- Gas prices fell another 2 cents, marking the fourth straight decline after rising more than 18 cents in 8 days following Hurricane Ike, according to a nationwide survey of credit card swipes at gasoline stations.

The average price of unleaded regular dropped 2 cents to $3.757 a gallon, from $3.777 a gallon, according to the survey released by motorist group AAA.

While prices have remained under $4 for some time, they are still much higher from a year ago, when gas was selling for less than $3 a gallon.

Current prices are about 34% higher from a year earlier at this time. Still, prices are 54 cents, or 13%, down from the record high price of $4.114 a gallon set on July 17

Gas prices had been moving higher following the devastation left behind by hurricanes Ike and Gustav.

More than 30 refineries, which convert crude oil into usable gasoline, had shut down or were operating with reduced capacity in the Gulf region after the storms hit. The number has since fallen by more than half, restoring gasoline supply to retailers and easing consumer prices.

Many crude pipelines in Texas and Louisiana had also shuttered ahead of the hurricanes. Those are slowly coming back on line.

Lower oil prices have also helped lower the cost of retail gas. Crude has been moving lower since mid-July amid weakening demand, losing more than a third of its value since it reached a record of near $150 just two months ago.

But oil prices rallied back above $104 a barrel Friday amid growing optimism that the government's various rescue plans will help ease the credit crisis currently stifling the U.S. economy.

Meanwhile, only three states now continue to report gas prices above $4 a gallon: Alaska, Hawaii and Illinois. Alaska continues to be the state with the most expensive gas prices, at $4.339 a gallon. The cheapest gas can be found in New Jersey, where gas cost $3.468 a gallon, according to AAA's Web site. 


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Will it work?

NEW YORK (CNNMoney.com) -- Experts are cautiously optimistic that the massive federal bailout of the nation's financial sector will solve the credit crisis that hit Wall Street this week.

But questions remain about whether it will prevent more failures of banks and Wall Street firms and many doubt this will lead to a quick turnaround for the battered housing market.

The plan, sent to Congress by the Bush administration late Friday, calls for the federal government to buy as much as $700 billion worth of mortgage assets held by banks, Wall Street firms and other financial institutions.

Those securities were backed by home loans, many made to buyers with bad credit or without proof of income. As housing values fell and foreclosures shot to record levels in the past two years, the value of those securities plunged. That in turn caused massive losses in the financial sector.

Comment on the bailout plan

This past week it reached a crisis situation. Banks and investment firms stopped making the loans to each other as they hoarded cash to protect against any sudden liquidity crunch as well from unknown problems on their partners' balance sheets.

Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke won support for the bailout plan from Congressional leaders in a meeting Thursday night.

Congress began working on the legislation Saturday, and there could be a vote as soon as the coming week.

"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 Friday. "I believe many members of Congress share my conviction."

Word of the plan first leaked Thursday afternoon, causing a massive rally in stocks at the end of the day that carried over into Friday. Several economists also praised the move.

"I'm confident this will work," said Mark Zandi, chief economist with Moody's Economy.com. "The federal government is committed to backstopping the nation's financial system and will do whatever is necessary to make sure the system does not unravel. The details are important but secondary."

The plan also won support from presidential candidates John McCain and Barack Obama. Zandi is an informal economic advisor to the McCain campaign.

Other experts said that while there are obviously big risks to taxpayers, the federal government has little choice but to provide the assurance to financial markets.

"If this doesn't work, we're in trouble, because there's not much more the government can do," said Jaret Seiberg, a financial services analyst at the Stanford Group. "They've left very few arrows in the quiver."

More losses, failures expected

But Seiberg added that the bailout won't completely end the recent turmoil on Wall Street, a crisis that began with the Treasury's seizure of mortgage finance giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) earlier this month and escalated this week with the bankruptcy of Lehman Brothers (LEH, Fortune 500) and the $85 billion loan to American International Group (AIG, Fortune 500), the world's largest insurer, by the Federal Reserve.

"What the government is doing now is not suddenly going to make institutions profitable," he said. "What we're talking about is trying to make them stable. That means removing the risk from their balance sheet and putting it on the taxpayer. The government has a much better ability to hold onto that risk for an extended period of time."

Still, Seiberg is optimistic that the bailout will help home prices finally start to recover since it should lead to lower mortgage rates and improve consumer confidence.

But others say that there are still enough fundamental problems in housing, including a huge glut of homes for sale and the likelihood of more foreclosures in the pipeline.

"It should help housing prices find a bottom but I still think it will be about a year from now -- and after prices decline another 10%," said Stuart Hoffman, chief economist for PNC Financial Services Group.

Nonetheless, even if home prices don't stabilize soon, one expert said the bailout could be a success if it allows bank to stop hoarding cash and once again begin lending to each other, consumers and businesses.

"The one thing you don't want is to have the economy grind to a halt because people can't get credit," said Dean Baker, co-director of the Center for Economic and Policy Research.

Baker predicts home prices will fall another 20% even with the bailout but said the decline could become even more severe without passage of the rescue plan.

"Housing prices were a bubble and you can't stop them from deflating," Baker said. "But [the bailout] might stop an uncontrolled plunge."

Will Congress pass the bailout?

Despite the support being voiced by Democrats and Republicans for the plan on Friday, Seiberg said its chance of passage is by no means certain.

"The odds of this passing are probably around 80% - and those are pretty good odds for Washington," he said. "But it's not a slam dunk."

Sen. Richard Shelby, the ranking Republican on the Senate Banking Committee, questioned the plan Friday morning, telling CNNMoney.com that he doubts it will be the last federal bailout in the sector that will be needed.

"Secretary Paulson and Chairman Bernanke have not said ...this is going to contain everything," he said. "They're hoping it is. What they're doing is jumping from crisis to crisis. I haven't seen a comprehensive plan yet."

He wouldn't commit to supporting the measure.

"This is too big to just accept without knowing what it does, who pays for it and is this the end of it," he said. "It's true that there's stress in the financial markets. But should we bail out everybody? We know it's important to the financial system, but at what price?"  


Big bailout: Where things stand

'Sobering moment'

NEW YORK (CNNMoney.com) -- Somber. Sobering. Warnings of an economic "meltdown."

That's how participants described an emergency meeting held Thursday night between leaders of Congress and Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke.

The meeting was followed by an announcement from Paulson thathe was preparing a far-reaching program - on a scale seen rarely in American history - to intervene in the shaky financial markets.

Paulson gave few details, although the plan's broad outline is for the federal government to buy hundreds of billions of dollars' worth of mortgage assets held by banks, Wall Street firms and other financial institutions. The Bush administration sent its proposal to members of Congress late Friday, according White House spokesman, Tony Fratto.

"Secretary Paulson and his team will continue their discussions with Congress and staff throughout the weekend, and we're hopeful that good progress will be made," Fratto said.

What did emerge clearly, however, was a surprising public show of unity by many lawmakers from both sides of the aisle who pledged cooperation to work on a solution with Bush administration officials with whom they often spar.

Official Washington - administration officials and legislative leaders alike - was clearly spooked by the events of the past week and what they heard from Paulson and Bernanke.

"I've never been in a more sobering moment in my 28 years with the language that was used - careful language - by the financial leaders of the ... country," Senate Banking Committee Chairman Christopher Dodd, D-Conn. told reporters on Friday.

Added House Financial Services Chairman Barney Frank, D-Mass., in an interview on C-SPAN: "We're not just talking about somebody on Wall Street losing money. ... We were in danger of there being enormous damage to the financial system."

One major concern: Wall Street firms were in danger of not being able to meet requests for redemptions from normally safe money market funds in which investors expect to get back at least as much as they put in.

This week alone, investors took out $210 billion from money market funds, with the bulk of those withdrawals coming on the heels of news that one fund had "broke the buck" - meaning its shares fell below $1.

On Friday morning, the Treasury said it would insure up to $50 billion in money-market fund investments at financial companies that pay them a fee to participate.

And on Friday, a conference call in which Paulson and Bernanke briefed House GOP members struck a similar tone, according to GOP aides who were on the call.

"The call was very sober, very strong on seriousness and very vague on details," one aide said.

The potential cost of the plan - as high as $500 billion according to leading Republican Senator Richard Shelby, R-Ala. - has raised a lot of concern. But apparently not as much as the concern raised by not doing anything.

"Chairman Bernanke made all too clear the cost of inaction. When I heard his description of what might happen to our economy if we failed to act, I gulped," said Sen. Charles Schumer, D-N.Y. "Everyone put aside their partisan differences and agreed to work together to pass something to address the state of our economy."

Schumer told CNN that while the rescue will be expensive, "the only salvation is it would cost even more" to do nothing.

Senate Budget ranking member Judd Gregg, R-N.H., told the National Journal's Congress Daily that when it came to the potential cost of plan, the choice is to "either put up the money now, or allow the [financial] system to unwind."

"The economy is slowly being strangled," said Lyle Gramley, a former Federal Reserve governor. The administration's case-by-case handling of the crisis so far hasn't worked, he said, "because it hasn't dealt directly with the principle problem, which is a lot of bad mortgage debt."

Banks are having a hard time raising capital because no one knows how to value the mortgage assets on their books. So they're reluctant to lend. Indeed, the flow of credit to consumers and businesses fell 40% in the first quarter and another 35% in the second quarter, Gramley said.

"We've been in a credit crunch that's getting worse," Gramley said. "Businesses can't borrow, which means they can't invest." And if they can't invest, they can't keep people employed.

In the end, the chaotic events in the market this past week convinced President Bush that it was time to act.

"Our system of free enterprise rests on the conviction that the federal government should interfere in the marketplace only when necessary," Bush said. "Given the precarious state of today's financial markets - and their vital importance to the daily lives of the American people - government intervention is not only warranted, it is essential."

CNN's congressional producers Ted Barrett and Deirdre Walsh and correspondents Kate Bolduan and Kathleen Koch contributed to this report. 


Lawmakers promise fast action