The Financial System Bailout: Deal or No Deal?

Congressional leaders announce a pact in principle, but it stalls under resistance from rank-and-file Republicans. McCain says he will debate Obama after all

The deal is on. No, it's off. No, it's on again.

Thursday was a day in Washington that would have tried the patience of Monty Hall. After an early-afternoon announcement that lawmakers had achieved the broad outlines of an agreement to rescue the financial markets with up to $700 billion of government investment, a flurry of political jockeying threatened to scuttle hopes of a deal. A high-profile meeting of congressional leaders and Presidential candidates John McCain and Barack Obama, seemed to yield little more than recriminations. And while lawmakers were slated to begin negotiations again late Friday morning, it was unclear who would take part.

In a very brief address Friday morning, President George W. Bush cautioned that reaching an agreement could take time. "The legislative process is not very pretty," he said. "But we are going to get a package done."

The Presidential campaign continued its gyrations as well. Shortly before noon on Friday, McCain announced he would, in fact, go to Oxford, Miss., to debate Obama as planned. The campaign had been set spinning on Wednesday when McCain proposed postponing the foreign-policy debate so he could head to Washington to help out, and suggested he might not take part if legislation addressing the financial crisis weren't complete. Now it appears the debate will focus on the financial crisis as well.

The stage was set for drama from the start. After several days of nearly nonstop negotiations, congressional leaders scrambled Thursday to hammer out a compromise agreement on Treasury Secretary Henry Paulson's proposed $700 billion financial system bailout in advance of an emergency White House meeting called by Bush

Adding to the tension, the White House meeting was also attended by Presidential contenders Barack Obama and John McCain—who had announced on Wednesday, Sept. 24, that he was suspending his campaign to return to Washington and help win an agreement on the controversial deal. With anxious voters ever more worried about the economy, and much of the public upset at the high cost of the bailout, the two candidates have sparred repeatedly over the last week, as each has tried to convince voters that he would be better placed to lead the nation amid the financial crisis.

By the time Obama and McCain arrived in town from the campaign trail, however, congressional leaders had already announced they had a preliminary agreement in hand. On Thursday morning, Senators Chris Dodd (D-Conn.) and Robert Bennett (R-Utah) and Representative Barney Frank (D-Mass.) said they had a deal in principle, though no details were offered. Some emerged as the day went on, but it also became unclear how solid Republican support for that deal was.

Restless House Republicans

As business and consumer lobbyists scrambled to find out what was still on the table and what was off it, several competing drafts of the potential agreement circulated around the capital. The few congressional aides in the know warned that it was all still subject to change. Lobbyists weren't the only people scratching their heads: With negotiations limited to a small group of congressional leaders, many members of Congress and their staffers appeared to have little idea as to what the package contained.

All of this did little to calm those who oppose the plan, either because of its hefty cost or because they are ideologically against the government moving so extensively to counteract private-sector failures. The late-morning agreement announced by Dodd "is obviously no agreement," said Senator Richard Shelby (R-Ala.), the top Republican on the Senate Banking Committee, as he emerged from the White House meeting. "There are still a lot of different opinions."

Meanwhile, some conservative Republicans in the House, led by Representative Eric Cantor (R-Va.), began circulating a counterproposal they contended would shore up the economy and U.S. markets at far less cost to taxpayers. Their plan would make use of a government-run mortgage insurance program, rather than have Uncle Sam buy overvalued mortgages from banks and other institutions.

Paulson Urges Speed

For all of the uncertainty, it appeared that a deal may be quite close, albeit one that faces opposition from at least a sizable crew of Republicans. Although no final agreement was reached at the meeting, White House spokeswoman Dana Perino said that the Administration and congressional leaders were continuing to work closely to forge a package. Indeed, chieftains from both parties in the House and Senate met again with Paulson and Federal Reserve Chairman Ben Bernanke on Thursday night, though they disbanded shortly after 10 p.m. with plans to regroup in the morning.

The Treasury Dept. issued a statement late Thursday urging fast finalization: "Secretary Paulson appreciates the hard work by members on both sides of the aisle to address the threat we face to our economy. Noting difficult credit market conditions, he urged members of both parties to complete legislation quickly. Treasury staff has been working with congressional committee staff since Saturday. There are still open issues to be resolved, and we are committed to resolving them."

So what's likely to be in a final deal? Congressional aides say agreement has been reached to approve the Treasury Dept.'s request for $700 billion, though it would be doled out in tranches. Treasury would get $250 billion immediately, then an additional $100 billion after it certifies that more is needed. But the final $350 billion could be withdrawn by a joint resolution of Congress.

Battle over Executive Pay Caps

Treasury appears close to agreeing in principle to congressional demands that Uncle Sam receive equity warrants in exchange for helping some of the troubled firms. As now proposed by congressional leaders, the government would receive warrants in cases where it engages in a transaction to help recapitalize an individual firm, but not when companies participate more broadly in the reverse auctions the government is expected to hold in order to buy up mortgage-backed securities. The proposed deal also directs that most of any profits eventually earned by the government when it sells off the mortgage debt should go to pay down the national debt, though a small slice is to be directed toward creating affordable housing.

Companies participating in the program would also have to agree to limit executive pay. According to one source, negotiators were wrangling over whether a cap could be placed on the dollar amounts of salaries deductible from corporate taxes. The practice of offering "golden parachutes" to departing executives would apparently be restricted.

It was unclear whether one of the most controversial provisions—allowing homeowners to get mortgage obligations reduced in bankruptcy court—was still included. That measure has been heavily resisted by the financial-services industry and has little, if any, Republican support; many analysts say its inclusion in the final package would be a deal breaker. One Democratic aide said it was still on the table in the afternoon, primarily as a bargaining chip.

"A Two-Step Process"

Congressional negotiators said they expected to hammer out the final terms of the deal with the White House by the weekend. Even if that occurs, significant hurdles remain. The package faces spirited opposition, especially from rank-and-file Republicans in the House. If they don't go along with it, Democrats say they won't push the package forward on their own, thereby risking the wrath of voters unhappy with the costly bailout.

"This is a two-step process. First, they've got to get a deal among the leaders," says Daniel Clifton, head of the Washington office of investment firm Strategas Research Partners. "But then they've got to get everyone else to go along."

And though most analysts assume that is likely at this point, it's not a done deal. That's where McCain comes in. Much will depend on whether he ends up backing the package and whether this might help to build Republican support. While upholding the need for aid in principle, he has been critical of the plan as it has been structured, and his comments on it have been ambiguous. Following the White House meeting, however, McCain expressed cautious optimism on the CBS Evening News. "In this case, I am confident that we will reach an agreement that gets a majority of my colleagues on my side of the aisle, as well as a majority of the other side," he said. Not long before, House Republicans opposing the plan had suggested McCain was sympathetic to their side.

McCain Is "the Wild Card"

Obama, appearing on CNN following the White House meeting, said there "has to be a sense of urgency on the part of everybody.…We've got to move rapidly." He said he believed there will be a deal, but that work remains to be done to bring about an agreement between the Democrats, the Administration, and House Republicans.

The question now is whether McCain will ultimately back the package, and if so, how strongly he'll work to build support among unhappy Republicans. One Republican aide argues that if McCain comes out strongly in favor of the deal and makes clear that it is necessary, he will provide Republicans with the political cover they need to explain their support for the bailout to their unhappy constituents. If he does this, he could help bring around enough votes to get the deal done. But if he doesn't support the deal, all bets are off. Winning Republican backing without McCain's support, says Clifton, will be tough.

"The wild card here is John McCain," adds a key Democratic staffer close to the negotiations. "The Republicans are very upset—they just hate this idea, they don't want to do it. But given the risks, they know they have to." The role McCain now wants to play in the process, the staffer says, introduces a whole "unknown element."

The open question, of course, is how politics will factor into McCain's use of whatever leverage he holds to push forward a deal. Democrats are leery of McCain appearing to sweep in at the last minute to help win an agreement; that, needless to say, could boost his standing against Obama. But given the public anger over the proposed deal, it's unclear how it would play if McCain were to insist on far more substantial changes in exchange for his backing. At stake is not just the election, but the health of the economy.

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