WASHINGTON - Congressional leaders and the White House agreed Sunday to a $700 billion rescue of the ailing financial industry after lawmakers insisted on sharing spending controls with the Bush administration. The biggest U.S. bailout in history won the tentative support of both presidential candidates and goes to the House for a vote Monday.
Key U.S. legislators released the compromise draft of the $700 billion bailout proposal early Sunday evening ahead of the opening of markets in Asia, and now have one final hurdle to clear: convincing the rank-and-file of their parties to support the legislation when it comes to a vote, likely on Monday.
In a press conference before meeting with House Democrats, Speaker of the House Nancy Pelosi, D-Calif., said the bill was a bipartisan piece of legislation. "If we don't pass it we shouldn't be a Congress," said Sen. Judd Gregg, R-N.H., who told reporters that he was confident the bill would pass without a further round of changes.
Under the legislation Treasury will be granted $700 billion in phases to acquire bad mortgage assets from financial institutions at a price it determines or through auction with a market price. If the Treasury decides to take the first option it will have some authority to determine the executive compensation structure of the firm.
If firms sell more than $300 million in assets in the auction, they will lose the ability to deduct the salaries of their top five individuals that have exceeded $500,000. For participating firms there will also be a surtax of 20% on retirement packages of top executives who are involuntarily terminated from their firms, or lose their jobs as a result of the firm's failure.
The Treasury would have authority to take warrants in companies that participate, effectively acquiring stock in the company. The warrants reduce the risk to the government since, if the price the government pays is too low and the banks benefit, the government would own a share of that benefit.
If all these provisions fail to recover the money spent by Treasury after five years, the president will be required to submit a plan to recover the shortfall from the financial services industry.
The 110-page draft legislation includes a number of other provisions:
--The bill contains extensive oversight of Treasury's operation. First, an oversight board made up of the Treasury secretary, the secretary of Housing and Urban Development and the chairmen of the Federal Reserve Board
and the Securities and Exchange Commission; second, a Government Accountability Office audit of the program; third, an independent inspector general for the program; fourth, disclosure requirements of the program's progress--transactions will be posted online.
--Several measures to help reduce the number of mortgage foreclosures. The government, as owner of mortgages and mortgage-backed securities, will be allowed to make loan modifications by lowering principal and interest rates on mortgages, or extending the life of the mortgage.
--The Securities and Exchange Commission will be granted the authority to suspend the Mark-to-Market method of accounting that has been blamed for exacerbating the crisis. A study will be undertaken to determine the effects it has on a financial institutions balance sheet.
--The Treasury will establish a voluntary program that gives firms the ability to purchase insurance on troubled assets, rather than selling them. House Republicans wanted this to be included to lessen the amount of government money that is being used in the financial rescue effort.
According to the terms of the bailout agreement, the Treasury would be allowed to buy $250 billion in troubled assets immediately. The president could request an additional $100 billion at any time. Congress has the right to not approve the remaining $350 billion; however, that action is subject to the president's veto. Since there is no date associated with this final amount, all of the money could be spent by the Treasury relatively quickly. Paulson has indicated that Treasury may be prepared to start purchasing assets within weeks.
House Republicans, who had rejected earlier versions of the bill, were conferencing Sunday evening to review the proposed legislation. House leaders have said they will not bring the bill to the floor unless they are confident they have the votes to pass. A statement from House Majority Leader Steny Hoyer, D-Md., said that "Now that we have broad bipartisan agreement, I intend to bring the final package to the House floor tomorrow for a vote."
Hoyer's confidence may not be premature. Rep. James Walsh, R-N.Y., emerged from the conference and said that although House Republicans would likely vote individually on the bailout plan rather than as a block, the reception of the plan among his House colleagues has improved. "I think they're much happier now with what they've been able to negotiate," he said.
The White House requested the unparalleled bailout in an effort to unfreeze the stalling credit market in the United States. Banks, unsure of each other's economic stability because of the risks poised by the mortgage assets, have been unwilling to lend to each other and, increasingly, to regular borrowers. Paulson and Fed Chairman Ben Bernanke, a historian of the Depression, led the charge for the government to buy up the bad assets and, they hope, reignite lending.
The weekend's negotiations capped eight days of drama in the halls of congress, including two lengthy congressional hearings on the matter, two nationally televised pitches by Bush in favor of the plan, a volatile and controversial meeting at the White House that included both presidential candidates, a full-fledged defection by a core block of Congress and three days of "deal or no deal?"
Congressional leaders met with Paulson in House Speaker Nancy Pelosi's office just off the Capitol rotunda shortly after 3 p.m. Saturday, and the talks were awkward from the beginning. Four members of Congress had been chosen to lead the negotiations: House Financial Services Committee Chairman Barney Frank, D-Mass.; Senate Banking Committee Chairman Chris Dodd, D-Conn.; the top Republican on the Senate Budget Committee, Sen. Judd Gregg of New Hampshire
; and Blunt, the powerful Republican Whip.
However, the Republicans quickly found themselves outnumbered by Democrats, including Conrad, Sen. Charles Schumer
of New York, Sen. Max Baucus of Montana, Rep. Charles Rangel of New York and House Democratic Caucus Chairman Rahm Emanuel of Illinois, along with Pelosi, Reid, Dodd and Frank. Most of the Democrats head committees directly related to economic matters.
With the exception of a one-hour dinner break, the lawmakers spent the remainder of Saturday in tense discussions, at times in several groups, with a few scuttling from one group to the other.
"This evening has been extremely difficult," Reid said at the midnight press conference when the discussions wound down. He praised Pelosi for brokering a breakthrough discussion at about 11:30 p.m., which appears to have been related to the executive compensation issue. Reid also mentioned the acrimony surrounding the discussions, noting that Paulson earlier in the evening had heard "a lot of pleasant words and some that haven't always been pleasant."
The breakthrough was announced in a corridor of the cavernous U.S. Capitol building. The negotiators at once appeared emotional, exhausted and, at times, a little nervous--perhaps because none of them ever clearly said a deal had been reached. Any hint that the talks had deteriorated could have been disastrous.
"This was never going to be a bill that was going to make people happy, because no solution to a problem can be more elegant than the problem itself," said Frank. "Given the dimensions of the problem, I think we have done a good job of trying to resolve it."
Walking back to his office early Sunday, Gregg told reporters, "Nobody's excited about doing this, but everybody recognizes the alternative to not doing it is so horrific that action needs to be taken." Will it work? We'll see.