by Zachary A. Goldfarb
Washington Post Staff Writer
September 21, 2008; 1:05 PM
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Treasury Secretary Henry M. Paulson Jr. today defended the escalating price tag of his plan to rescue the financial markets, saying it is unlikely that taxpayers will end up paying the full $700 billion the Bush administration is requesting to buy the troubled mortgage assets of crippled financial firms.
Paulson appeared on four Sunday news talk shows to urge Congress to pass legislation immediately authorizing the Treasury to act on its plan. He rejected comparisons of the plan to government spending on the Iraq war or massive programs such as Social Security and Medicare.
"This is not traditional spending. This is money to purchase illiquid assets. Those assets will be held and will be sold" so the government will recoup some of the costs, Paulson said.
"The cost won't be anything like what is put out to buy these investments," he said.
But Paulson acknowledged he does not know what the cost ultimately will be. "We can't determine what the cost is today," he conceded.
Paulson delivered his plan to Congress yesterday with a price tag $200 billion higher than he had estimated on Friday. Democrats have responded well to the plan, although they said they would propose several provisions that could generate opposition from the Bush administration, such as efforts to help homeowners struggling to pay off their mortgages or limits on executive compensation.
Some Republicans, meanwhile, have raised concerns about the sweeping nature of the government intervention to bail out the private markets.
Paulson urged Congress not to load up the legislation with controversial provisions. "We need this to be clean and quick," he said.
Rep. Barney Frank (D-Mass.), also speaking on the Sunday shows, reiterated concerns that corporate executives not profit from the rescue plan. "We have a difference on what's clean . . . ," he said. "It would be a grave mistake to say that we're going to buy up a bad debt that resulted from the bad decisions of these people and then allow them to get millions of dollars on the way out."
But Sen. Charles Schumer (D-N.Y) acknowledged that time was of the essence and Congress could not pack the this bill with other benefits. "We will not 'Christmas tree' this bill," he said. "The times are too urgent. Everyone has their own desires and needs. It's going to have to wait."
Paulson said without action on the plan this week, the credit crisis could quickly affect average Americans.
Last week, "the capital markets were frozen, we had a situation where American companies weren't able to borrow money," Paulson said. "This could ultimately affect small banks, loans to businesses, loans to farmers, jobs, people's retirement."
Paulson said he has "every confidence that Congress will go along with" the plan.
The plan would also make foreign financial firms eligible to sell their bad assets to the Treasury.
"If a financial institution has business operations in the United States, hires people in the United States, if they are clogged with illiquid assets," Paulson said, "they have the same impact on the American people as any other institution."
Sen. Richard Shelby (R-Ala.), a member of the Senate Banking Committee who has been skeptical of the rescue plan, said the cost of the plan is likely to be $1 trillion.
"We don't know the end game in this," Shelby said. The Treasury and Federal Reserve have "been staggering from crisis to crisis, and they haven't even said today that this will end the crisis."
Paulson said the intervention was "not something we wanted to do." He said that "excesses" in lending and borrowing had built up over much of this decade, starting a "chain reaction" that spread to financial institutions and now is "playing out in the broader economy."
"This is a humbling experience to see so much fragility in our capital markets," he said.
Paulson said the ultimate cost of the plan would depend on the economy.
"The price you will get for those assets will be based upon how the economy does, the pace at which the housing markets recover," he said.
Paulson also defended the administration's decision to bail out Fannie Mae, Freddie Mac and insurance giant American International Group, but not Lehman Brothers.
In the case of AIG, he said, "This is a situation where there are 50 different insurance regulators, very little oversight at the holding company, a hedge fund on top of insurance companies."
Paulson, who is expected to leave office with the Bush administration in January, said a new administration will have the flexibility to change the program.
"What I'm doing is reacting to deal with the situation we see in front of us today and to do so in a way that protects the American people," he said.
"We very much need regulations, new policies. That is going to take some time," he said.
Paulson said the United States is pressing other countries to take similar steps to bail out their troubled financial institutions.
"We are talking very aggressively with other countries around the world and encouraging them to do similar, and I believe a number of them will," he said.
The Treasury would hire professional asset managers to run the program, he explained. He said, as of now, hedge funds wouldn't be eligible to sell their troubled mortgage assets to the government.
Paulson rejected the idea that the administration could have acted sooner.
"I'm not sure what we could have done sooner," he said. It's been a "once-in-a-50-year kind of a situation here. And there is no way that we could have gone to Congress and got the authority to inject capital into the banking system by buying illiquid assets unless there was the clear and urgent and obvious need."
Paulson spoke on NBC's "Meet the Press," ABC's "This Week," "Fox News Sunday" and CBS "Face the Nation."