Bernanke, Paulson: Congress must act now

Across the Capitol complex, Vice President Dick Cheney and President Bush’s top advisers met privately with restive House Republicans, some of whom emerged from the session unpersuaded.

“Just because God created the world in seven days doesn’t mean we have to pass this bill in seven days,” said Rep. Joe Barton, R-Texas.

Added Rep. Darrell Issa, R-Calif., “I am emphatically against it.”

Paulson, seated next to Bernanke at the Senate hearing, objected strongly when Chuck Schumer, D-N.Y., asked if $150 billion might be enough to get the program started, with a promise of more to come.

That would be a “grave mistake,” and would fail to give the markets the confidence they needed to rebound, Paulson responded.

Rep. Barney Frank, D-Mass., the Financial Services Committee chairman who is leading talks with Paulson on the plan, also called phasing in the bailout “highly unlikely.”

Paulson was asked repeatedly why taxpayers should accept the burdens of a bailout.

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“You worry about taxpayers being on the hook?” he replied at one point. “Guess what — they’re already on the hook.” Paulson suggested that the fallout from the credit crisis would hit almost everyone in the pocketbook unless forceful action was taken. Moreover, the flawed and outdated regulatory system, which didn’t catch abuses, needs to be overhauled, he said.

In New York, meanwhile, Bush was telling the U.N. General Assembly that the United States was taking “bold steps” to prevent an economic calamity that would be sure to have major effects around the world.

One of the tricky issues confronting policymakers is how to price the distressed assets that the government would ultimately buy.

Bernanke suggested buying the assets at a “hold-to-maturity” price, which would be based on an estimate of what the securities would eventually be worth as payments came in over the years.

“If the Treasury bids for and then buys assets at a price close to the hold-to-maturity price, there will be substantial benefits,” Bernanke said. “First, banks will have a basis for valuing those assets and will not have to use fire-sale prices. Their capital will not be unreasonably marked down.”

In contrast, if banks use existing “mark-to-market” rules that require them to value the holdings at what similar securities have recently sold for — in some cases pennies on the dollar — it could make the whole bailout futile because it would hurt many banks’ balance sheets, causing some to fail. “This creates something of a vicious circle,” he said.

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