Tentative bailout deal reached

House could vote on $700 billion plan today

Sept. 28, 2008 12:00 AM
Wire services

WASHINGTON - Congressional leaders and the Bush administration have reached a tentative deal on a bailout of imperiled financial markets that could cost taxpayers hundreds of billions of dollars.

The House could vote on it today and the Senate on Monday. House Speaker Nancy Pelosi announced the accord just after midnight and said it still has to be put on paper. Treasury Secretary Henry Paulson talked of finalizing the deal but added: "I think we're there."

The plan would spend up to $700 billion, most of it on buying deeply devalued mortgages from the housing market's collapse and other bad loans held by tottering banks and other investors.

The aim is to prevent credit from drying up and causing a meltdown of the U.S. economy.

Democrats and Republicans from both chambers met with Treasury Secretary Henry Paulson in an effort to forge a compromise on a variety of outstanding issues, including how quickly the government should make money available for the program and whether participating firms should be required to limit executive pay.

"We're moving, we're moving," said Sen. Christopher Dodd, D-Conn., chairman of the Banking Committee, as he re-entered talks after dinner.

Talks also focused on a new issue: how to cover the cost of the program so taxpayers don't get stuck with the bill.

Under the Bush administration's proposal, the government would buy assets that have lost much of their value from faltering financial institutions in hopes of restoring investor confidence. That, in turn, could ease the credit crunch that has seized global markets and made it much harder for businesses and ordinary people to borrow money.

Administration officials have stressed that the ultimate cost of the bailout would be much less than $700 billion because the government would eventually sell the assets it purchased and recover most, if not all, of what it spends.

On Saturday, Democrats said they were pressing hard for further taxpayer protections, including a fee that would be imposed on the financial- services industry if after five years the government had not fully recouped its money. The proposal, which did not surface in negotiations until Saturday, would help win the support of a fiscally conservative group of House Democrats known as the Blue Dogs, an important bloc of 47 votes.

"We believe that the taxpayer should not be left holding the bag at the end of the day, and we've proposed a way to address that," said Rep. Chris Van Hollen, D-Md., a member of House Speaker Nancy Pelosi's leadership team.

Paulson and some Republican lawmakers were said to be cool to the idea, though House Republicans also have expressed serious concerns about the cost of the program and have suggested other ideas for limiting taxpayer exposure. A House GOP plan to allow the Treasury secretary to federally insure some mortgages, in addition to the purchase of the least valuable mortgage-backed securities, is under discussion as well.

"While we do believe the Congress needs to act to avert this crisis, we also believe we should not be bailing out Wall Street on the backs of American taxpayers," said House Minority Leader John Boehner, R-Ohio.

But even staunch opponents of the emerging plan said they expected it to pass.

Sen. Richard Shelby, R-Ala., the senior Republican on the Senate Banking Committee, who has refused to participate in the talks, said a "critical mass" was forming behind the measure because of fears that Congress' failure to act would cripple financial markets and devastate the economy.

But Saturday's negotiations were filled with tension, according to participants.

The nearly three-hour negotiations in the afternoon happened around a massive table in Pelosi's conference room, where an ornate portrait of Abraham Lincoln looked down on the negotiators. The number of Democrats in the room became such an irritant that Paulson called Senate Majority Leader Harry Reid, D-Nev., to ask why Republicans were sometimes outnumbered 5-to-1 at the table, according to three GOP sources familiar with the call.

Reid told him he would not pull out any of his colleagues. A Reid spokesman, Jim Manley, said, "If the secretary doesn't like it, that's just too bad, because he is going to need the help of each and every one of them to sell the president's plan to the Democratic caucus and the American people."

The focus on limiting taxpayer exposure may help rally support in Congress, where lawmakers have been reluctant to back the hugely expensive and unpopular bailout measure less than six weeks before the November election. But it could unnerve Wall Street, where investors are seeking the largest possible program with the fewest strings attached. They also hope lawmakers approve it before Monday's opening bell.

In his public testimony and private remarks, Paulson has repeatedly emphasized the need to spend $700 billion to soothe nervous markets. At that price, the investment would be more than the $600 billion Congress ratified Saturday to pay for next year's operations of the departments of Defense, Homeland Security and Veterans Affairs.

But the White House and politicians on Capitol Hill have stressed that the rescue package would ultimately cost much less. Some of the mortgage-backed assets at the heart of the plan are nearly worthless now because house prices are plummeting, but their value is likely to rise before the government sells them, when the housing market recovers.

"Many of these assets still have significant underlying value because the vast majority of people will eventually pay off their mortgages," Bush said Saturday in his weekly radio address. "In other words, many of the assets the government would buy are likely to go up in price over time. This means that the government will be able to recoup much, if not all, of the original expenditure."

Bush attempted to address criticisms from the right and left that the plan would bail out irresponsible financiers while doing nothing for regular Americans. Echoing frequent comments by him and his aides, Bush said allowing Wall Street to collapse further would pose greater dangers to the economy, perhaps triggering a "deep and painful recession."

"The rescue effort we're negotiating is not aimed at Wall Street - it is aimed at your street," Bush said. "And there is now widespread agreement on the major principles. We must free up the flow of credit to consumers and businesses by reducing the risk posed by troubled assets."

Democrats, too, tried to play down the $700 billion figure.

"Nobody believes that's going to be the final cost," House Majority Leader Steny Hoyer, D-Md., told reporters.

Democratic leaders have emphasized to rank-and-file members that Paulson has told them that he could only spend about $50 billion a month on the securities-purchase program.

Meanwhile, they are pressing to release the money in segments - $250 billion immediately, $100 billion later and the final $350 billion only after Congress is given a chance to object - a move that they say will allow Congress to closely oversee how the money is spent.

All parties to the talks have agreed on at least one point: the need for an oversight board to ensure the program is run properly. The final details of the board remained unclear, and most lawmakers said it was too early to know who is likely to run it.

Hoyer said that whoever oversees the bailout program must instill "confidence" in the public and must not have conflicts of interest with the financial markets or the Treasury.

Negotiators were still haggling Saturday night over details of other provisions, including lawmakers' demands that Treasury require any firms that participate in the bailout to ban "inappropriate or excessive" compensation for their senior managers. Democrats also want to strip certain tax deductions from companies that pay executives more than $400,000.