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US Congress questions bailout plan

The World Today - Tuesday, 23 September , 2008 12:18:00

Reporter: Peter Ryan

ELEANOR HALL: To the global financial markets now, where there's been a sudden return to reality.

After the euphoria of the last two trading days, share markets in Europe, the US and now Australia
have fallen on fears that the US government's $700 billion bailout plan might not work.

Members of the US Congress are edgy about signing off on an effective blank cheque to bail out the
banks but not the victims of the worst housing slump since the Great Depression.

And now another of America's most prestigious investment banks, Morgan Stanley, looks like it may
be bought up - in this case by a Japanese investor.

Business editor Peter Ryan has our report.

PETER RYAN: It's now three days since the $700 billion bailout plan was hastily released, and in
that time, it's been criticised for being big on goals, but short on details.

Fearing a global financial catastrophe if Wall Street melts down, the US Treasury Secretary Henry
Paulson wants the bailout rushed through Congress.

But Democrats and Republicans alike want a bigger say on where and how the billions will be spent -
not just the wealthy on Wall Street, but Americans people who need to refinance their housing debt.

Democrat Barney Frank also says the fund shouldn't be used to reward failed banking executives with
severance packages and bonuses.

BARNEY FRANK: If you are the CEOs and the top people who made these decisions that are requiring
the tax payers to put money at risk, and we don't think we're going to spend, we're certainly not
going to spend $700 million ultimately, but we're putting it at risk before we know how much we'll
recover, and you're telling us that having made those decisions that require this taxpayer money,
we can't limit the outsize compensation you're getting?

PETER RYAN: Florida republican Cliff Stearns worries the plan will blowout America's national debt,
and that ultimately the taxpayer will foot the bill.

CLIFF STEARNS: This plan increases our excessively high national debt to $11.3 trillion while also
allowing foreign banks, foreign banks which hold US mortgage debt, to benefit from the billions
provided by this bailout.

This plan constitutes the largest government bailout in history, yet it does nothing to protect the
taxpayers.

PETER RYAN: Henry Paulson and the and chairman of the US Federal Reserve face an increasingly
suspicious Congress tomorrow. Both will be under pressure to deliver some quick answers.

The uncertainty caused a heavy fall on Wall Street this morning, with the Dow Jones Industrial
Average down 3.2 per cent and the Australian market opened 1.7 per cent lower.

DOUG DACHILLE: Right now, the details are very unclear and that's a big issue, and you saw the
impact of uncertainty and lack of clarity today in the markets, so my advice now is prior to
passing the legislation, let's make it clear what the rules of the game are.

Investment strategist Doug Dachille has a list of questions for Hank Paulson and Ben Bernanke.

DOUG DACHILLE: What assets are going to be eligible? Everybody's lobbying for mortgage related
assets, but it's going beyond mortgage related assets. People want to put in auto loans, student
loans, home loans, corporate debt, everything is going to go into this.

PETER RYAN: And despite the initial optimism that the bailout would put the economy back on track,
doubters are starting to emerge.

JEFFREY FRANKEL: There has been a tremendous, just in the last 24 hours I would say, counter
reaction.

PETER RYAN: Professor Jeffrey Frankel was an economics advisor to Bill Clinton.

He says the US budget is already overloaded without the $700 billion bailout.

JEFFREY FRANKEL: We're in a position where the budget deficit is rising very rapidly, the national
debt was rising very rapidly because of the completely unrelated measures, the program of tax cuts
that mostly went to the rich and that was enacted by President Bush in 2001 and 2003, plus the
rapid increase in spending, especially defence spending, such as in Iraq and Afghanistan. But not
just defence spending, so we already were facing a situation of looming larger and larger budget
deficits and then coming along, the entitlements problem that the baby boomers are going to start
retiring this year.

PETER RYAN: Meanwhile, the process of picking over Wall Street remains continues.

Japan's Mitsuibishi UFJ Financial group is taking a 20 per cent stake in Morgan Stanley, and Nomura
Holdings is buying Lehman Brother's Asia Pacific operations, in what could be seen as an ironic
twist.

GILLIAN TETT: Two decades ago the Americans were worrying because Japanese banks were coming in on
the back of their domestic bubble and buying up a bunch of Wall Street names.

PETER RYAN: Gillian Tett, the global markets editor at The Financial Times, can see certain kind of
karma in the crisis.

GILLIAN TETT: The Japanese banking system plunged into crisis when their own property bubble
collapsed, and in the late 1990s, the Japanese banks were in such crisis that the Americans went in
and bought up some of the Japanese names.

Now of course we've had the American system collapse into crisis as the result of another property
bubble and so the Japanese are back again. So I guess the one thing you can say from all this is
that nobody ever seems to learn from anybody else's mistakes.

ELEANOR HALL: Gillian Tett, the global financial markets editor at The Financial Times, ending that
report from Business editor Peter Ryan.