Democratic and Republican negotiators will return today to try to revive a deal over a $700 billion rescue fund for at-risk financial institutions after it was derailed by House Republican opposition, interrupted by presidential politics and stymied by partisan sniping.
House and Senate lawmakers met again Thursday night with Treasury Secretary Henry Paulson Jr. and Federal Reserve Chairman Ben Bernanke at the Capitol, exactly one week after the two warned Congress to act fast to pass a bailout plan or risk bringing the economy to a standstill due the greatest liquidity crisis since the Great Depression.
The meeting came after the principals attended a White House summit called by President Bush with GOP presidential nominee Sen. John McCain of Arizona and Democratic nominee Sen. Barack Obama of Illinois. The summit was expected to be mostly a photo-op marking a deal, and a chance for McCain and Obama to be seen playing a role in the financial rescue. Instead, it was the scene of impassioned pleas from Bush and Paulson to support a bailout that they say is needed to prevent a severe recession.
Bush said at the beginning of the hourlong meeting that "all of us around the table take this issue very seriously, and we know we have to get something done as quickly as possible."
Toward the end of the meeting, Senate Banking ranking member Richard Shelby, R-Ala., emerged to tell reporters: "I don't believe we have an agreement."
Shelby said he showed Bush five pages of comments from economists who criticized the administration's financial rescue package, saying, "The Paulson plan is a bad plan. It will not solve problems; it will create more problems."
Asked about a potential agreement outlined by Senate Banking Chairman Christopher Dodd, D-Conn., Shelby said, "that agreement, obviously, is no agreement."
When asked if an agreement had been reached, Jim Manley, a spokesman for Senate Majority Leader Harry Reid, D-Nev., told reporters at the White House, "We're still working on it."
A source close to the negotiations said it is unclear whether some compromise can easily be reached between Republicans, on the one hand, and Democrats and the administration on the other. "I'm not sure whether is it possible without starting over," he said.
Foreign financial markets and stock futures in the U.S. fell on the news, but the declines were not as large as the huge swings seen in the last week.
As the bailout plan was foundering Thursday, federal regulators were stepping in to sort out the biggest bank failure in history. Washington Mutual, a savings and loan with 2,200 branches, was seized by the Federal Deposit Insurance Corp. after customers pulled out nearly a 10th of the bank's deposits -- $16 billion. Federal officials organized a sale of the bank to JPMorgan Chase for $1.9 billion, a fire sale price that is just 5 percent of WaMu's value a year ago. FDIC officials say the sale to JPMorgan will protect depositors -- provided that Morgan itself remains solvent.
The WaMu failure is just the kind of repercussion that Paulson has told congressional leaders will be widespread if the bailout is not swiftly approved.
After the White House meeting broke up and members headed back to the Capitol, Democrats had pointed remarks for McCain -- who announced Wednesday he would suspend his presidential campaign and return to Washington to help broker a deal -- saying he inserted himself into talks that were nearing a consensus. "He has done nothing ... in the last few hours to help this process," Reid said.
But a McCain spokeswoman said the senator was there to play a constructive role to help bring House Republicans on board -- a deal many Republicans believe goes against their free-market principles and would incur too much government debt.
"We're optimistic that Sen. McCain will bring House Republicans on board without driving other parties away, resulting in a successful deal for the American taxpayer," said McCain spokeswoman Kimmie Lipscomb.
Their votes are needed, as House Democratic leaders have taken a stance that the vote will not go forward unless there is a majority in both caucuses to support the measure, which would allow Treasury to buy the toxic mortgage debt off the balance sheets of lenders and other institutions to bring more liquidity to the market. Democrats contend House Republicans have to take ownership for a plan proposed by the Bush administration that lacks public support. Some have compared the vote as politically sensitive as raising their own pay, especially as it takes place shortly before Election Day.
"If it's going to pass, it needs to be bipartisan," said House Majority Leader Steny Hoyer, D-Md.
The talks continued after negotiators said they had reached an agreement in principle Thursday afternoon in a meeting with key Senate Republicans and House Financial Services ranking member Spencer Bachus, R-Ala.
Bachus later backtracked in his support, saying that he was not empowered to speak for House Republicans. When the principals reassembled at the Capitol at night, Bachus was back in the negotiating room.
Sen. Robert Bennett, R-Utah, said Thursday night that the principals wanted just four people to negotiate the bill, but would not say if they were authorized to sign off on a deal.
The earlier agreement would have provided $700 billion for the Treasury Department to purchase toxic mortgage debt, with $250 billion immediately available and an additional $100 billion released upon the secretary's certification that the funds are needed. Congress could stop the final $350 billion if it cleared a joint resolution of disapproval.
The Treasury secretary would be required to set standards to prevent excessive or inappropriate executive compensation, though it did not contain any specific details. It would require all purchases to include equity sharing, including through an auction process.
Most of the profits would be used to reduce the national debt, under the agreement. An undetermined amount of funds received for sale of the bad assets would be placed into a newly created affordable-housing trust fund.
The draft would establish an oversight board with cease-and-desist authority and an inspector general.
To help homeowners, Treasury would be encourage to "maximize and coordinate" efforts to modify mortgages. The department would be required to modify loans for mortgages controlled or owned by the federal government, applying to those by Fannie Mae and Freddie Mac, which are under government conservatorship.
It did not contain a Democratic provision 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 -- though House Financial Services Chairman Barney Frank, D-Mass., said the proposal is not dead.
House Republicans produced a proposal Thursday, which would require the Treasury Department to create an insurance program to insure about half of all mortgage-backed securities that the federal government currently does not guarantee.
It would be paid for by premiums by banks that hold the assets. "The big problem with the [draft] bill is that the taxpayer is stuck with the tab," said House Budget ranking member Paul Ryan, R-Wisc. Ryan said he would allow Treasury to set the price for such debt. McCain has not endorsed the plan.
Pelosi said it would be up to Paulson to determine if the House GOP proposal could be included, but she added "this is not the time for academic discussions." Frank said Bachus told him that he wasn't driving the insurance plan and noted that no member asked Paulson his views of the idea during a Financial Services hearing Wednesday. "They were afraid to ask because it's a bad idea and he's already told them it's a bad idea," Frank said.
Rep. Steven LaTourette, R-Ohio, said five members of the moderate Republican Tuesday Group met with five members of the Blue Dog Coalition to craft a plan that would be more advantageous for the taxpayer, even more than the proposed equity stake in the draft and beyond a preferred-stock stake.
LaTourette said members have developed a Plan B if the House Democratic and Republican whip counts show that it does not have enough support. "We have the bones of Plan B," LaTourette said. He did not detail the plan.
by Bill Swindell, with John Maggs, Larry Lipman, Humberto Sanchez, Darren Goode, Christian Bourge, Ben Schneider and Dan Friedman contributing