WASHINGTON — Lawmakers and the Treasury Department continued to hash out details on a proposal to buy back illiquid assets, but there was growing anxiety over whether the plan would stabilize housing markets.
The concern cut across party lines and included several Senate Banking Committee members, who raised issues with how it was going to function and whether it would do so effectively — even if they planned to support the proposal.
Despite numerous attempts to press Treasury Secretary Henry Paulson for operational details, lawmakers appeared no closer to any answers.
"What troubles me most is that we have been given no credible assurances that this plan will work," Sen. Richard Shelby of Alabama, the committee's senior Republican, said at the hearing's outset. "We could very well spend $700 billion and not resolve this crisis."
At least part of the problem was credibility. Several lawmakers expressed frustration with Mr. Paulson, who sought extraordinary powers over the government-sponsored enterprises two months ago but argued he would never need to use them. The government eventually employed them to seize Fannie Mae and Freddie Mac this month.
"How many times can the administration be wrong and still instill confidence?" asked Sen. Robert Menendez, D-N.J. "I'm not going to be stampeded into rubber stamping this proposal."
The concern over the plan went far beyond Capitol Hill. Several observers said that even though experts predicted massive problems last year as defaults on mortgages rose, Mr. Paulson did little.
"The question we should ask is, why should we trust him?" said California State Assemblyman Ted Lieu, D-El Segundo. "Remember Paulson's 'Hope Now' solution to prevent foreclosures that he hyped at the beginning of this year? I, consumer groups, and countless others repeatedly warned that Secretary Paulson's plan did virtually nothing to resolve the problem of unsustainable lending and uncontrolled foreclosures.
He proceeded with window dressing when fundamental reform was needed."
The primary target remained the plan itself, with some pushing for more to help struggling homeowners and others arguing that Mr. Paulson is focused on the wrong issue.
Michael S. Barr, a University of Michigan law professor and former special assistant to then-Treasury Secretary Robert Rubin, said the Paulson plan needed to focus on restructuring underlying loans, rather than simply buying illiquid assets.
"The plan as initially conceived was quite ill formed," Prof. Barr said in an interview. "The program was designed to take tranches of securities, rather than figuring out a system to buy pools of mortgages or the loans underlying the assets. Unless you do that, … you're not helping homeowners. You're just shifting troubled assets from the books of institutions to the United States."
At the Senate Banking Committee hearing, Sen. Jim Bunning agreed that the plan was misguided.
"The Paulson plan will not help struggling homeowners pay their mortgages," the Kentucky Republican said. "The Paulson plan will not bring a stop to the slide in home prices. … I am frightful to the point of almost panic that I don't see a solution in your plan to address this financial crisis that we are in."
Despite the skepticism, the proposal still appears headed for quick enactment once policymakers can agree on details. Lawmakers offered few viable alternatives, and both Mr. Paulson and Federal Reserve Board Chairman Ben Bernanke said the consequences of not passing a bill would be catastrophic.
"If the credit markets are not functioning, jobs will be lost, more houses will be foreclosed on — the economy will not be able to recover in a normal and healthy way," Mr. Bernanke said. "If this is not done, there will be significant adverse consequences."
In defense of his plan, Mr. Paulson stuck to cautious, political answers, which often did not reveal much or satisfy the questioner. His performance clearly vexed Sen. Shelby and others.
"We need better answers," Sen. Shelby said at the conclusion of the hearing. "I don't think Congress should just ratify what's been thrown up here."
The success of the proposed buyout facility may turn on how the Treasury Department sets the prices of illiquid assets it buys and whether enough financial institutions participate. At the hearing, Mr. Paulson was pressed on both points. He responded that the Treasury was still working the details out. He said it would use "different approaches to different situations."
"You and I can't sit here and figure out what the auction technique should be," he told Sen. Robert Bennett.
The answer left the Utah Republican frustrated.
"In theory, it's easy to describe it will work, but if you end up paying too little to these institutions, which mark-to-market accounting might drive you to, you are not giving them the support that you need," he said. "If you end up paying too much, then there is no upside potential for the taxpayer when the time comes to liquidate these."
Lawmakers also made clear that they were seeking stronger reassurances that changes to the Treasury's plan would be incorporated to reduce taxpayer risk, increase accountability, mitigate foreclosures, and put curbs on executive compensation.
But Mr. Paulson and Mr. Bernanke warned that piling on added requirements could cause some institutions to stay away from the new facility.
They emphasized that they wanted healthy institutions — in addition to troubled ones — to use it to essentially recreate a market for illiquid assets.
"For this to work, we need a broad base of institutions to participate, not the ones that are just under immediate pressure," Mr. Paulson said.
But Sen. Jack Reed, D-R.I., pushed back on why the government should not demand equity stakes in the companies in which it invests to give the taxpayer additional protections. He said equity stakes did not prevent American International Group Inc. from seeking a loan from the Fed, which took a 79.9% stake in the insurer.
"There is a need to show the public that this is not a one-way salvation at the expense of taxpayers," Sen. Reed said.
He also asked Mr. Paulson to pledge to limit the assistance to only regulated financial institutions. Senate Banking Committee Chairman Chris Dodd said that was an "excellent point."
Mr. Paulson did not make such a guarantee, but he said the focus was on regulated financial institutions.
"We want to deal with regulated financial institutions on a broad basis," he said.
Though Mr. Paulson rejected adding restrictions to executive pay as part of the bailout package, Sen. Dodd said such a provision was necessary for political support.
"Almost any plan we consider is going to include executive compensation," the Connecticut Democrat said. "Count on it."
During the hearing Sen. Charles Schumer suggested creating a insurance fund for large financial companies that would be similar to deposit insurance for banks and thrifts.
To protect taxpayers, he asked "whether we shouldn't create an insurance fund similar to the FDIC to cover all the financial system."
Mr. Paulson and Mr. Bernanke said they were open to the idea.
Though the hearing was meant to secure lawmakers' support, it ended on a dire note for some.
"You want $700 billion for a concept that you don't know how this is going to work," said Sen. Bob Corker, R-Tenn. "We really don't know what this is going to do."