Senate Committee hears bailout proposal

Treasury Secretary Henry Paulson and Chairman of the Federal Reserve Ben Bernanke fielded questions from the Senate Banking Committee today. Paulson and Bernanke were joined by Christopher Cox, chairman of the SEC, and James Lockhart, director of the Federal Housing Finance Agency. The four urged the Committee to pass legislation allowing the Treasury to spend up to US$700 billion to bailout investment banks by purchasing their "illiquid debt".

They made the pitch to the committee to bail out Wall Street by passing legislation giving the Treasury unprecedented authority and little oversight. The $700 billion will bail out investment banks with illiquid mortgage assets, securities these firms cannot sell because of the state of the housing sector. The proposal will create a reverse auction, in which the illiquid debt will be bought by the Treasury at a price much higher than the fire sale prices the securities are currently valued out.

The debate centered around whether the government should be involved, is $700 billion too much, will it work, the issue of oversight, and the urgency of the situation.

Paulson and Bernanke claimed that such a bailout is precondition to a healthy recovery to the economy; credit is contingent on a healthy economy, the purchase of the bad debt will increase the lending to business and consumers to help the recovery of the economy.