Tax News

CCH (cch.taxgroup.com) reports:

  Treasury Secretary Henry M. Paulson, Jr., speaking in the wake of a major shake-out of Wall Street investment firms Lehman Brothers and Merrill Lynch, stressed on September 15 that the public can remain confident in the "soundness and resilience" of the U.S. financial system. "The American people can be very, very confident about their accounts in our banking system," he said.

  Paulson stressed the need for balance between regulation and market discipline, and called for major regulatory changes in the intermediate and longer term. He also emphasized the need for additional authorities to deal with non-bank financial institutions. Such steps will require congressional action, Paulson said, adding, "Right now, we're working with the tools we have."

  When asked about the extent of future federal involvement in financial markets, Paulson replied that it is important that regulators remain vigilant. "We're very vigilant, but we do not take, and I don't take, lightly... putting the taxpayer on the line to support an institution," he said. Pressed on why the government did not intervene to support Lehman Brothers in the way that it helped Bear Stearns earlier in 2008, Paulson claimed the situations were "very, very different...I never once considered that it was appropriate to put taxpayer money on the line in resolving Lehman Brothers."

  Paulson reiterated that the root of the current problems in the financial sector lies in the housing correction. "Until we stem the housing correction, until the biggest part of that is behind us and we have more stability in housing prices, we're going to continue to have turmoil in the financial markets." He added that there is a "reasonable chance" the biggest part of the housing correction could be over within a number of months. "I'm not saying two to three months, but in months...as opposed to years," Paulson said.

  Meanwhile, President Bush expressed confidence that, over the long term, capital markets are flexible and resilient enough to deal with the current adjustments. Bush said his administration is working to reduce disruptions and minimize the impact of financial market developments on the broader economy.

Financial Markets Working Group

  Bush will be briefed on financial market conditions by members of the President's Working Group on Financial Markets on September 16. He will deliver a statement on current financial conditions following the meeting.

  The President's Working Group (PWG) is composed of Paulson, who chairs the group; Federal Reserve Board Chairman Ben Bernanke; Securities and Exchange Commission Chairman Christopher Cox; and Commodity Futures Trading Commission acting Chairman Walter Lukken. The PWG meets regularly to consider market issues and appropriate regulatory responses. It was created by Executive Order in 1987.

Second Stimulus Package

  As Congress considers the ramifications of the current turmoil on Wall Street, federal lawmakers are weighing the prospects of advancing a second stimulus package. White House Press Secretary Dana Perino on September 15 questioned whether any proposals under consideration would provide a short-term boost to the U.S. economy. She indicated that additional measures to stimulate the economy are not limited to a second, short-term growth bill.

  "It could come in the form of energy legislation and that's what we will be focusing on," Perino advised. She added that Democrats in Congress have not yet united behind a final economic growth package and what Republican members have seen so far "falls short of what we could do for this economy to actually stimulate in the area of energy."

  Perino did not specify how provisions in the energy bill could stimulate economic growth, create new jobs or increase short-term consumer spending. She maintained that legislative proposals to start and fund new infrastructure projects would not have "short-term, positive economic stimulus impacts on the economy."

  House Majority Leader Steny Hoyer, D-Md., has maintained that Democrats have no intention of allowing the federal government to shut down since the annual appropriations bills have not been passed for fiscal year 2009. Although the scheduled adjournment date for the 110th Congress is September 26, lawmakers will work with the Bush administration to craft a Continuing Resolution (CR) that funds the government beyond October 1. Hoyer said he does not favor calling a lame-duck session of Congress.

  Hoyer hinted that, since the CR is the only must-pass legislation that Congress must act on before it leaves Washington, lawmakers might consider including a second economic stimulus package in the measure. While he did not give a comprehensive list of items likely to be included, Hoyer mentioned spending on infrastructure, such as bridges and roads, help for low-income families facing high energy bills, unemployment insurance and hurricane and flood relief.

  By Sarah Borchersen-Keto, Stephen K. Cooper and Paula Cruickshank, CCH News Staff

Treasury Department News Release, TDNR HP-1134