Will Boosting FDIC Insurance Revive The Bailout?

In a relatively quiet day in Washington – at least by the standards of recent weeks – Congressional leaders, Treasury officials and the crowd of lobbyists closely following the talks over Treasury’s now-stalled $700 billion rescue package for the financial sector began the hunt for new measures that would bring the package back to life.

With many members of Congress and their staffers out of the capital on Tuesday and Wednesday due to the Jewish holiday of Rosh Hashanah, much of the activity took place in series of informal meetings as the various factions of Republicans and Democrats took stock of Monday’s failed vote and the market rout that followed. They studied the voting pattern closely and tried to assess just what changes might be needed to garner the roughly dozen votes needed to pass the bill in the House. While one business lobbyist had pointed out in the wake of Monday’s defeat that “there is no plan B”, by Tuesday morning the effort to develop one – not to mention a Plan C and a Plan D, if they should be needed — was well under way.

The day began with an early morning television address by President George Bush, who tried to dial back the populist backlash against what has been perceived as a bailout for Wall Street by warning the nation that “the consequences will grow worse each day if we do not act.” White House chief of staff Josh Bolten also headed to Capital Hill to try to win over some of the rebellious House Republicans who helped defeat the bill. Senate Majority Leader Harry Reid (D-Nev.) sat down with Senate Banking Chairman Christopher Dodd (D-Conn) and other Democrats to consider their options, while Senate Minority Leader Mitch McConnell (R-Ky) hit the Senate floor to pledge that Republicans would continue to work towards progress.

"I too want to reassure the American people that we intend to pass this legislation this week. We will pass it on a broad bipartisan basis, both sides cooperating to prevent this financial crisis from persisting.” McConnell said. “I think the message from the markets yesterday was clear.”

There was no lack of possible changes being bandied about Washington, including an all-new proposal – labeled the “No Bailouts Act” – by a group of Democrats who would like the whole Paulson-backed approach to be thrown out. But that prospect seemed highly unlikely. Congressional sources say that it would now be too difficult, and too time consuming, to start from scratch. “There are as many plans out there as egos,” said one senior Democratic aide. “But it’s not practical at this point to start over.”

Moreover, in the wake of Monday's huge stock market losses -- and a more concerted effort by the bill's backers to persuade voters that it is aimed at keeping mortgages, student loans and other credit flowing to average Americans, rather than just bail out Wall Street -- some of the opposition is receding. Congressional staffers now say they have begun to receive calls urging support for the plan, a sharp contrast from the weekend, when calls ran overwhelmingly against it. And in a new survey by pollster Scott Rasmussen, some 33% of likely voters now support it, versus 24% last Friday.

So rather than starting anew, any revived bill will likely have at its core the compromise package that was rejected on Monday. The real question that Treasury officials, legislators and lobbyists alike were scrambling to figure out was whether they could bolster the bill enough to draw the needed GOP support. Conservative Republicans, who see the costly bailout as an affront to their free-market values, remain the most strongly opposed to it; they are also acutely aware that many of their constituents are among those most strongly against the unpopular package. If enough of them can be drawn in, that would result in a more centrist final package. If not, then the Administration might ultimately have to depend on boosting Democratic support to get the bill passed, which would tilt it more towards Democratic priorities such as increased economic stimulus or more measures to protect struggling homeowners.

But Speaker of the House Nancy Pelosi is loathe to let that happen; even if the Democrats get most of what they want, they too are plenty concious of the fact that much of the public hates the package and its high cost. “It’s in everyone’s interest for this to be bipartisan,” says Brian Gardner, a Washington policy analyst for Keefe, Bruyette & Woods, an institutional brokerage specializing in the financial services industry. If the package became too closely identified with the Democrats, he adds, “they’d be giving the GOP a campaign issue; they’d be writing the Republicans’ campaign ads for them.”

So what’s back on the table? Throughout Tuesday, there was growing talk that increasing FDIC insurance on individual bank accounts from the current level of $100,000 to $250,000 – at least temporarily -- might go a long way to resolving the problem. House Republicans had proposed a bump up in FDIC insurance early in last week’s negotiations, but the idea had gained little traction. On Tuesday morning, however, Democratic presidential contender Barack Obama endorsed the idea, and his Republican rival did so hours later on CNN. And though House Republicans displayed little sign on Tuesday of narrowing their deep divisions over what to do next, Minority Leader John A. Boehner (R-Ohio) released a statement saying “the presidential candidates’ support for increasing the FDIC cap is welcome news.” Economists suggest the move may do little to resolve the financial crisis, but could help reassure consumers and small businesses

It could also help win over moderate Republicans, argues Daniel Clifton, the head of the Washington D.C. office of Strategas Research Partners, an investment advisory firm – a thought seconded by one high-ranking Democratic aide. “Republicans need to figure out something that appeals to the populists” complaining about the package, he says. That’s not likely to happen by adding a reduction in capital gains taxes to the rescue package, as some Republicans have called for. “I don’t know if increasing FDIC insurance would be enough, but it’s something that small banks have always wanted,” he adds. Small businesses might be happy to see such a move as well, as would many individuals now worried about how safe their money is. That could help calm fears that more bank runs are ahead if more institutions fail.

By Tuesday afternoon, the idea seemed to be gaining more traction. In a memo sent by Rep Barney Frank (D-Mass), the chairman of the House Committee on Financial Services to other Democrats on the committee, Frank said that Sheila Bair, the head of the FDIC “has notified me that they will be requesting authority to increase the deposit insurance limit.”

And Bair herself came out in support of the idea. "To address this crisis of confidence, I do believe that it would be helpful for the FDIC to have the temporary ability to raise deposit insurance limits," Bair said in an e-mail to the trade publication American Banker. "This would provide the dual benefits of providing additional liquidity to banks for lending as well as provide some additional reassurance to depositors above the current limits."

Some Republicans, and a few Democrats, have also called for suspending “mark-to-market” accounting for troubled financial companies. As prices for mortgage-related assets have tumbled – and prices are hard to come by at all for some securities – companies face having to lower the assets' values on their balance sheets, with potentially painful consequences. Supporters of changing the rules say market values in such circumstances don’t reflect the assets’ “true” values, and that companies should be allowed to use other figures instead; opponents argue the move would only mislead investors, further undermining trust in the underlying health of financial companies.

On Tuesday, the Securities and Exchange Commission and accounting rule-makers issued guidance emphasizing the role of judgment in valuing these assets when market prices aren’t readily available. Although the guidance didn’t break new ground, accounting experts say it could be interpreted as giving companies more flexibility, reassuring them that they can be more lenient in marking down troubled assets – on the belief that they are fundamentally sound or likely to recover, for example. That could lead some companies to be overly aggressive and game the system, some accounting experts worry. “Investors want to know what your asset is valued at today, not what the sentimental value is,” said one auditor at a larger firm.

Further moves to protect taxpayers from suffering big losses after the government buys up big chunks of toxic mortgage-related assets from financial institutions could also be worked into the bill. In the current bill, a provision was added late in the negotiations that would require the Treasury to assess whether the program has cost taxpayers money after five years. As written now, however, the Treasury isn’t required to do anything if the program ultimately causes taxpayer losses. But that protection could be strengthened to require the Treasury to assess fees on the financial services industry to cover any deficits in the program if the taxpayer does end up with the short stick. Doing so, points out Jaret Seiberg, a Washington based analyst who follows financial services policy for the Stanford Group Companies, would allow lawmakers to argue that taxpayers are not at risk of any losses from the program.

Another possibility: ratcheting down the amount of money that the Treasury would have access to without further Congressional approval, argues Tom Gallagher, the Washington policy analyst for institutional broker ISI Group. In the current bill, the agency would receive a first tranche of $250 billion, and then it would have access to another $100 billion by certifying that it was needed. Only the final $350 billion tranche would be subject to further Congressional approval. But Republicans leery of handing that much money over to the Treasury without more oversight might be won over if a further Congressional nod was required for anything over the first $350 billion slice.

Still, not everyone is convinced that enough Republican support can be gained to push the rescue plan over the top. Indeed, if Congressional leaders move too far in the direction needed to win over conservative Republicans, they risk losing the more numerous Democratic supporters of the bill.

“A choice will have to be made over whether the Democrats should go it alone, and not have the whole package held hostage to the House Republicans,” says Howard Glaser, a high ranking housing official in the Clinton Administration and former chief lobbyist for the Mortgage Bankers Association who now heads consulting firm The Glaser Group. “They are rapidly reaching the point where that may be the only way to go.”

Of course, that too has its complications: Negotiators would have to add enough goodies to win over the roughly 15 or so Democrats needed without losing what Republican support the package has in the House or in the Senate, where the GOP members tend to be somewhat more moderate.

The first thing that would likely come back on the table would likely be the last thing the Democrats gave up to get a deal: provisions that would allow judges to lower mortgage loan obligations in bankruptcy court. While many Republicans are opposed to the measure, Glaser points out that in the last stage of the talks on Saturday, negotiators had given consideration to allowing the bankruptcy provision under certain limited conditions. If the judicial flexibility were restricted only to certain loan types, for example, or only to loans originated during a certain time period, he says, the Democrats might be able to convince Senate Republicans to go along in order to push the talks over the line.

Broader restrictions on executive pay could also be back in play. Under the current bill, the restrictions on pay that all sides agreed to are fairly limited. For firms that sell assets to the Treasury through an auction, for example, golden parachutes can only be limited at those companies that sell more than $300 million in assets; moreover, those limits will only apply on contracts signed in the future; current contracts will be respected. But one top Republican Senate aide says if the Democrats demanded pay controls be expanded to a broader array of companies, many in the GOP might go along. “There are a lot of people who aren’t much worried about it, who think “who cares about executive pay’” if that’s what it takes to get a deal, adds the aide.

And if those sorts of specifics don’t work? The other option would be to move ahead simultaneously with a new stimulus package, as many Democrats have clamored for. “The votes will have to come from the Democratic side, and you do that by throwing in more infrastructure spending, food stamps and extending unemployment benefits,” says Strategas’ Clifton. “That’s the way out.”

That might also help make the argument that the overall deal coming out of Washington is being redirected more towards Main Street than Wall Street. But there are risks here as well. Add too much spending to gain Democratic votes, and negotiators could lose Republicans seeking to reestablish their bona fides as fiscal watchdogs. Whichever direction they choose to head, legislators and Treasury officials who will once more take up negotiations have a very thin needle to thread.

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