Yesterday afternoon Congressional leaders and the Bush Administration appeared to have reached general consensus on support for a plan proposed by Treasury Secretary Henry Paulson. ("Deal on Rescue Package Expected to Be Reached Today, Prompt Enactment Likely")

  • That plan would provide US$700 billion dollars for the Treasury Department to buy and resell "toxic" assets from financial firms to stabilize market confidence.
  • The arrangement would feature oversight by a bipartisan board, caps on executive compensation, some form of federal equity in participating companies and release of funds in stages over several months.

What a difference a few hours makes.

Apparent Agreement Falls Apart Following White House Meeting

Indications the Paulson plan was in jeopardy began with comments by Ranking Republican on the Senate Banking Committee, Richard Shelby (AL), at a White House meeting with President Bush and top Administration officials, together with Republican and Democratic leaders from both House and Senate, and presidential candidates Barack Obama and John McCain.

  • House Republican Leader John Boehner, representing many members of his party who oppose the plan, said that there were insufficient votes in support of the plan at that time.
  • House Republicans, spearheaded by Congressman Jeb Hensarling (TX), Chairman of the Republican Study Committee, a conservative caucus, have strong concerns about the scope and authority provided in the Administration's proposed program and are pushing their own alternative plan. The authors of the House GOP alternative plan are Eric Cantor (VA) and Paul Ryan (WS). Their plan would stimulate market confidence with targeted tax cuts and other free-market measures to attract investors to the markets.

The House GOP Alternative

As described in information from Mr. Boehner's office:

  • The House Republican alternative would provide for government insurance to cover the risk of default of the mortgage-backed securities. Premiums would be paid by the institutions holding the assets. (It is unclear how much this would cost.) The government would be called upon to fund its obligation if and when the insured mortgages actually default.
  • To address the lack of liquidity in the banking system, the House Republican alternative would remove regulatory and tax barriers to private equity coming into the banking system. (There have been indications tax relief would include suspension of the tax on capital gains, but this is not specified.) Currently, private equity funds are disallowed from taking a controlling equity interest in depository institutions (including bank holding companies) unless they are willing to be regulated under the Bank Holding Company Act. Removing the layer of regulation would, in theory, encourage private investment in the banking institutions.
  • The House Republican alternative would also require participating firms to disclose to Treasury the actual value of their mortgage assets; mandate that Freddie Mac and Fannie Mae no longer securitize any unsound mortgages; require the SEC to audit the reports of failed institutions to ensure that their financial condition was accurately portrayed and to review the work of the credit agencies to make certain of their ability to rate accurately the value of the financial instruments; and create a blue ribbon commission to make recommendations for reform.
  • The alternative would also deny Wall Street executives from benefiting from taxpayer funding.

A one-page summary of the House GOP alternative from Mr. Boehner's office is here.

President Bush Still Committed, Democrats Feel Blindsided

President Bush pleaded with members of his own party not to derail what had appeared to be agreement on swift government action to stabilize the markets: "Don't start over," Bush said. "Don't start over."

Democrats expressed consternation over what they regarded as last-minute Republican sabotage of the deal: "I didn't know I was going to be the referee for an internal GOP ideological civil war," commented House Financial Services Chairman Barney Frank (MA).

Efforts to Bring GOP Members on Board Problematic

From the beginning of negotiations to hammer out details of the rescue plan that appeared near approval on Thursday, Democratic leaders made it clear they could not move legislation to the floor unless sufficient Republican support – approximately 100 GOP House members – was behind it. The current estimate is that only about 40 members are on board.

Conservative objections are based both on objections in principle to what they regard as the excessive cost of the Paulson plan and "socialist" government intervention in the private sector as well as an outpouring of constituent calls against the plan.

Said one member: "I would say they are 50-50 - between 'no' and 'hell no.'" With the reelection of all House members on the line, such sentiments from constituents speak with a loud voice.

Stay Tuned . . .

Frantic negotiations continued through the evening between the Bush Administration and House GOP leaders. Very strong bipartisan support remains for quick passage of a financial rescue package. This point was delivered again by President Bush in brief comments this morning.

  • House Speaker Nancy Pelosi (CA) has told members of Congress that she wants to work with the GOP to get an acceptable package completed quickly and is asking for a substantial number of House GOP members to support a final plan. Sen. McCain also is meeting with House and Senate GOP leaders this morning on the rescue plan.
  • Ongoing negotiations on the Administration's plan revolve around the overall cost of the plan, installments on the release of funds and inclusion of some form of an insurance mechanism, as House GOP members are advocating.
  • At latest report, the original three-page legislative draft of the Administration plan may be up to 102 pages. The GOP alternative plan does not yet appear to have been drafted as a legislative text.
  • This morning Senate Majority Leader Harry Reid (NV) said Congress would stay in session until a rescue package is enacted. He also said Congress would work with the President to modify his plan.
  • Pointedly, Senate Banking Chairman Chris Dodd (CT) said they are working with "serious Republicans" - that is, not those, mainly House members, opposed to the plan.
  • Mr. Dodd identified three areas as non-negotiable: (1) limits on executive compensation; (2) federal equity in participating institutions; and (3) strict accountability and oversight. Mr. Dodd also said they will try to address the plight of individual foreclosures.

As they say you never want to watch sausage or legislation being made.