Behind closed doors at an early breakfast this summer, Federal Reserve Chairman Ben S. Bernanke shared his concerns with Henry M. Paulson Jr. about the treasury secretary's plans for a massive bailout of a troubled segment of the financial markets: Could he really get a Democratic Congress to grant broad new powers to a lame-duck Republican administration?
Paulson said he was confident. About two weeks later, Congress indeed handed Paulson sweeping authority to rescue ailing mortgage financiers Fannie Mae and Freddie Mac.
Now, as Congress considers a second request from Treasury -- this time for broad discretion to spend $700 billion to buy troubled assets from distressed Wall Street firms -- Paulson again confronts the liability of working for an administration in its twilight. Only this time, he's discovering that it's harder to get what he wants.
Paulson is also finding his credibility questioned after having told lawmakers two months ago that he had no intention of using his new authority to rescue Fannie Mae and Freddie Mac, ultimately putting taxpayer dollars on the line to do so.
After Bernanke heard Paulson's self-assured response at their breakfast, the Fed chairman replied: ''I'll back you up. Do everything you can to get it,'' according to Paulson, who recently recounted the meeting.
This week, Bernanke has again given Paulson his full support as the two men press Congress on their ambitious bailout of the financial system. But so far, even Bernanke's stature has not been enough to persuade Capitol Hill to approve the measure over widespread voter objections.
"We don't deal only with Wall Street. We deal with Wall Street, but we also deal with Main Street," Senate Majority Leader Harry M. Reid (D-Nev.) said at a news conference yesterday. "And Secretary Paulson, fine man that he is, has learned a lot about how we serve our constituents. And so these obstacles can be overcome, but those appointed officials, like Paulson and Bernanke, are going to have to become more realistic."
‘Roller coaster’
This week has been a "roller coaster" for Paulson and rougher for him than he may have expected, said one federal official who knows him well. Last weekend, he pushed lawmakers in the House to have an agreement in place before financial markets opened on Monday, fearing that indecision by Congress would further roil Wall Street.
By Friday, despite a flurry of meetings on Capitol Hill and late-night phone calls, a deal had still escaped him. Meanwhile, conditions in the credit markets continued to worsen, making it difficult for corporations to get money and threatening to pull some down.
Paulson had been worried in the days before announcing the plan about putting such a weighty proposal in the hands of Congress, according to Treasury officials. But they said he saw little choice after the credit markets that provide funding to a wide range of U.S. corporations nearly grinded to a halt.
Some lawmakers have openly wondered whether Paulson, a creature of the financial markets who was shaped by his decades at the investment bank Goldman Sachs, understood the politics of putting so much taxpayer money on the line for Wall Street firms.
"I think that there's been some degree of amazement from the White House, and certainly Secretary Paulson and Chairman Bernanke, that people who run for elective office have constituencies that they have to take care of," Reid said yesterday.
Treasury officials said Paulson is very much aware of the pressures on lawmakers.
"There's very much understanding that this is hard to do," said Treasury spokeswoman Michele Davis, who also is director of policy planning. "But at the same time, if we are going to do it, we have to make sure it works. We have to absolutely talk about compromises that various people need and lots of other ideas that can improve the program. But for the sake of political compromise, we can't do something that would make the program ineffective."
Davis said that by the week's end most lawmakers understood that more than Wall Street's health was at stake and that the economy would be threatened if the plan failed to pass.
Paulson still faces a challenge primarily from lawmakers in President Bush's own party. Many Republicans have been unswayed by lobbying from the White House, including some of the administration's most powerful figures.
Some of these Republicans had earlier questioned the wisdom of bailing out Fannie Mae and Freddie Mac. Paulson's "success in Fannie and Freddie contributed to his difficulties here," said Edwin Truman, a former assistant secretary of the Treasury during the Clinton administration and now a senior fellow at the Peterson Institute for International Economics. "How often can you go to Congress to get a blank check?"
Pulling the trigger
In pressing Congress to obtain the authority to rescue Fannie Mae and Freddie Mac, Paulson in July told a Senate Banking Committee hearing: "If you've got a bazooka, and people know you've got it, you may not have to take it out." Less than two months later, however, Paulson pulled the trigger, putting the two mortgage firms under government control.
Paulson is also trying to win the trust of lawmakers after his previous ad hoc effort to rescue firms such as Fannie, Freddie and insurance giant American International Group failed to stem the financial crisis.
Paulson himself said it was time to scrap the case-by-case approach in a speech at Treasury a week ago. He said his new comprehensive strategy has a better chance of calming the turmoil in the markets.
''I am convinced that this bold approach will cost American families far less than the alternative -- a continuing series of financial institution failures and frozen credit markets,'' Paulson said.
