Intervention in markets is unparalleled

ANALYSIS:IT WAS half past midnight on Saturday night when congressional leaders and US treasury secretary Hank Paulson sealed a tentative deal to inject up to $700 billion into the financial system by taking over "toxic" mortgage securities from vulnerable banks, writes Arthur Beesley, Senior Business Correspondent, on Wall Street

Long days of haggling on Capitol Hill over the contours of the controversial plan had left them tired-eyed. Although taxpayer anger and political resistance left the government with no choice but to amend its proposal, the intervention in the public markets will be unparalleled in scale.

Bruised by stinging charges of unAmerican behaviour, the government has argued that the plan represents the minimum required to restore stability in the financial system. Against a backdrop of rising pressure on international money markets - and frantic weekend efforts to prop up three major banking institutions in the US, Britain and Belgium - the package will swiftly go to a congressional vote, most likely today.

While the task now is for political leaders to deliver the votes required to pass the measure into law, Paulson had to grant big concessions to Democrats and Republicans in Congress to get the deal this far.

His original plan was only three pages long, sweeping in scope and conferring virtually unfettered power to the government. The finished article runs to 100 pages, with independent oversight.

Crucially, the government will get the power it sought to buy up $700 billion in illiquid securities. ut only half the money will be immediately available and release of the second half will be conditional on support from Congress following a review of the initial expenditure.

Himself a former chief of Goldman Sachs, Paulson had to swallow a number of other compromises that will make the bailout less palatable to his friends on Wall Street.

These include measures to "guarantee" taxpayers are repaid in full if other protections have not actually produced a profit.

In some accounts, there will be a requirement on the US president to levy a fee on the financial industry if the government does not recover its money after five years.

It also includes measures for limits on top-level pay in participating companies; a ban on multi-million-dollar "golden parachutes" for unsuccessful bosses; restrictions on pay schemes that encourage "unnecessary risk-taking"; and power to recover bonuses paid based on promised gains that later turn out to be false or inaccurate.

In addition, the US government will take shares in participating companies. The government will also be first in line to recover assets if a company fails.

In an attempt to reduce some two million mortgage foreclosures expected in the next year, the government will also have power as owner of the loan securities to facilitate modifications such as a reduced principal or interest rate or a lengthening of the loan term.