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July 18, 2023

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Bush Calls for $700 Billion Rescue Plan

POSTED: September 20, 2008, 12:00 pm

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As the nation’s economic crisis continues to wreak havoc on the financial markets and erode investor confidence, President Bush announced a federal buyout plan that could cost as much as $700 billion to shore up banks and financial institutions in danger of collapse. Standing with Treasury Department Secretary Henry Paulson, Federal Reserve Board Chairman Ben Benarnke, and Securities and Exchange Commission  (SEC) Chairman Christopher Cox, Mr. Bush discussed the economic crisis in a Rose Garden press briefing at the White House.

In recent days the Bush administration has come under withering attack from Democrats and Republicans on Capitol Hill who criticized the White House for instituting emergency measures without first consulting Congress, and each party, through their presidential candidates, trading accusations over who is responsible for the current debacle. The President immediately sought to downplay the criticism. “There will be ample opportunity to debate the origins of this problem. Now is the time to solve it. In our nation's history, there have been moments that require us to come together across party lines to address major challenges. This is such a moment.”

Over the last several weeks the nation has witnessed some of its largest financial institutions teeter toward collapse. The current wave of instability can be traced back to the collapse of investment bank Bear Stearns last March. The manner in which Bear Stearns fell was breathtaking. Over a weekend (March 14 – 16) the firm’s shares dropped 93 percent, as it was sold to JP Morgan Chase  for just $2 a share; a sale that received the support of the Federal Reserve.

Next came the failure  of IndyMac Bank  in July, its seizure by federal regulators and the run on the Pasadena, California bank that its failure precipitated. After a period of months when rumors were rampant over the instability of several institutions, the proverbial other shoe dropped when the federal government had to step in to seize mortgage giants Freddie Mac and Fannie Mae, as both companies faced imminent collapse and could have triggered a nationwide panic had they failed.

Just one week after the two mortgage firms were seized a whirlwind of events over a 72 hour period sent the markets stumbling. First, investment bank Lehman Brothers was told there would be no federal rescue for the venerable Wall Street firm. Without a bailout in sight, the heads of the nation’s largest banks were summoned to the New York Federal Reserve Bank to try to reach agreement on a plan to hold off a bankruptcy filing by Lehman Brothers. There would be no such agreement and the firm filed for Chapter 11 bankruptcy the following Monday. As the drama over Lehman Brothers unfolded, Bank of America made a surprise bid for brokerage house Merrill Lynch, a move that temporarily arrested some of the jitters caused by Lehman’s collapse. It would be a short lived reprieve as insurance giant American International Group (AIG) announced it would seek federal aid to the tune of a $40 billion bridge loan. A meeting last Monday initially produced little cooperation from federal regulators and other institutions that had considered stepping in. Eventually the Federal Reserve announced a loan package that resulted in the federal government taking a major equity stake of AIG’s insurance business.

The bailout proposal would let the federal government buy $700 billion of the bad mortgage debt in a move not seen since the Great Depression. The plan, if approved by Congress, would give the government authority to buy the debt of any financial institution for the next two years. The move would require the statutory cap on the federal deficit to be lifted, from $10.6 trillion to $11.3 trillion. The White House and Congressional leaders are negotiating this weekend with the hope of moving legislation through Congress early this week.

For the first time President Bush acknowledged the magnitude of the current crisis. In his remarks on Friday the President warned, “Further stress on our financial markets would cause massive job losses, devastate retirement accounts, and further erode housing values, as well as dry up loans for new homes and cars and college tuitions. These are risks that America cannot afford to take.”

President Bush sought to reassure Americans over the security of their bank deposits in the face of recent events. Mr. Bush offered, “Every American should know that the federal government continues to enforce laws and regulations protecting your money. Through the FDIC, every savings account, checking account, and certificate of deposit is insured by the federal government for up to $100,000. The FDIC has been in existence for 75 years, and no one has ever lost a penny on an insured deposit -- and this will not change.”

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