Negotiations on a multibillion-dollar federal program to purchase bad debt from struggling financial firms continued at a dizzying pace Monday, with a consensus forming on limiting executive pay at firms that participate in the program.
But a bid to require banks that take federal aid to accept a major change in bankruptcy law by allowing judges to reduce the principal of the mortgage to a home's current market value faces an uphill battle -- with some resistance even among Democrats.
Drafts circulated with consistent revisions on the legislation that would allow the Treasury Department to purchase up to $700 billion in bad mortgage debt.
The talks followed a similar path to the economic stimulus package passed this year. House Financial Services Chairman Barney Frank pitched ideas back and forth with Treasury Secretary Paulson in a bid to strike a quick deal at the urging of House Speaker Pelosi. "This legislation will pass and it will pass soon," said Pelosi.
Meanwhile, Senate Banking Chairman Christopher Dodd worked with panel colleagues Monday night to craft their bipartisan package, though Banking ranking member Richard Shelby held his cards closely in negotiations.
"I believe Congress must immediately undertake a comprehensive, public examination of the problem and alternative solutions rather than swiftly pass the current plan with minimal changes or discussion," Shelby said. During stimulus package negotiations, Frank and Paulson cut a quick deal over Shelby's objection.
Shelby will get his say today when the Banking panel hears from Paulson and Federal Reserve Chairman Bernanke. The two will then appear in front of Financial Services on Wednesday.
Publicly, Frank was in charge during the day holding two briefings, though he had to backtrack on some claims that he had reached an agreement with Treasury on some items.
Frank said that he and Dodd were essentially in agreement between their two drafts, though a Senate Democratic aide later disputed that and noted "significant differences" remained.
Frank was optimistic that on executive compensation, where he has proposed language that would limit any executive compensation that would be "inappropriate or excessive" and includes a claw-back provision that would allow firms to reclaim incentive pay from senior personnel based on financial statements that later proved to be inaccurate. It also would prohibit severance compensation -- so-called golden parachutes -- for two years.
Dodd had similar language in a draft he put forward before revising it with all of his committee members.
Paulson has expressed opposition to such language, saying that if it is too restrictive, executives will not participate. But such warnings are falling on deaf ears with lawmakers less than 50 days before an election in which voters are finding it hard to swallow a Wall Street bailout while they are dealing with higher energy and food prices.
"That's an issue that I think on a bipartisan basis everybody wants to see something done on," said Sen. Mel Martinez, R-Fla. "I think some element of that will have to be in that package."
But the bankruptcy provision has proven to be more problematic, though it was contained in both Frank's and Dodd's working draft. A Senate vote on such a measure failed by a 58-36 tally in April as lenders lobbied aggressively against the bill, arguing that it would drive interest rates up by as much as 2 percent because investors would face fewer guarantees on their investments.
"We can find another way to skin this cat without adversely affecting the credit markets further, without having bankruptcy judges cram down the mortgages," said a top aide to a moderate Democrat.
Frank had said that he thought he had an agreement with Treasury on providing additional relief to homeowners at risk of losing their home, though Monday night he said there was no deal on that provision.
A Frank draft would allow Treasury to encourage servicers to take advantage of a new $300 billion program that would allow at-risk borrowers to refinance into new fixed loans guaranteed by the Federal Housing Administration. The department would also have to request loan services to avoid preventable foreclosures.
Dodd and Frank are pushing to grant Treasury warrants to purchase stock in firms that participate in the program, so the federal government could potentially make a profit if the companies' value rises once they get rid of their bad debt.
Frank took to selling the plan Monday night to his colleagues, telling them the proposal was fluid. After a House Democratic Caucus meeting, Rep. Emanuel Cleaver, D-Mo., expressed dismay about the proposal and predicted that members were 9-1 against it.
"This is not popular, and the public is saying if you bail out Wall Street, who will bail us out?" He added that he doesn't want to be blamed for the bill.
"I think everyone feels a little ambushed," said Rep. Keith Ellison, D-Minn.
Vice President Cheney and White House Chief of Staff Bolten will address House Republicans this morning on the issue.
This article appears in the September 27, 2008 edition of NJ Daily.