The final language of the bill must still be negotiated with Treasury, which watched nervously from the outside as the closed-door meeting ran close to three hours in the Capitol. But the announcement gives renewed momentum to the massive government intervention, which the administration badly wants approved before the markets open next week.
“We think we have fundamental agreement on a set of principles,” said Senate Banking Committee Chairman Chris Dodd (D-Conn.). “We’re very confident we can act expeditiously, and we’ve done a good job arriving at that kind of consensus.”
Those principles will include improved oversight of the program, as well as a plan to phase in the $700 billion investment in stages, while still assuring the administration a virtual free hand for at least the first $350 billion.
There is a greater emphasis on efforts not just to relieve Wall Street firms of their bad debts but also to help homeowners threatened by foreclosure. Companies that benefit from the plan would be expected to limit pay and severance packages for their executives, and community banks are expected to benefit from a new $3 billion tax break as a result of their stock losses in the government takeover of the two mortgage finance giants, Fannie Mae and Freddie Mac.
The announcement came just hours before a White House meeting planned for Thursday afternoon, at which President Bush and the two presidential candidates, Sens. John McCain and Barack Obama, are expected to meet with congressional leaders as well as some of the same lawmakers from the House Financial Services and Senate Banking Committees.
It’s very unlikely that a final agreement can be reached with Treasury prior to that meeting, which was called by Bush at the urging of McCain. But Sen. Bob Bennett (R-Utah) said he believed that legislation could be finalized in time for Congress to act Friday or this weekend.
Nonetheless, the introduction of presidential politics into the process could still backfire, and it has already fed suspicions on both sides. Democrats worry that the White House meeting will become a photo and political opportunity for McCain at the expense of Obama.
At the same time, Treasury worried that it was excluded from the long meeting Thursday, precisely because Democrats wanted to stall any final agreement until after the White House session.
Sen. Judd Gregg (R-N.H.), who participated in the talks and has close ties to the White House, conceded that portions of the package won’t be to Treasury’s liking.
“There are things they won’t be comfortable with — obviously there was a lot of give on both sides. ... I think they may be very concerned about some sections of it, but the overall thrust of it will be to give them the authority they need to address the underlying problem, which is to get these securities out of the blocking pattern that they are in relevant to the credit markets. This will allow the Treasury secretary to go and clean up the credit markets using basically tax dollars.”
Treasury Secretary Henry Paulson asked for the $700 billion funding authority as part of his initial bill, arguing that the large number is an important signal to the markets of the government’s commitment. Nonetheless, the administration has since paid a heavy political price for not better explaining its initiative as an “investment” by taxpayers — and one which will surely be repaid to some level as the economy improves.
The whole debate has exposed an angry anti-Wall Street cultural divide, and Paulson, a former Goldman Sachs CEO, has been the target of critics who argue that “Main Street” taxpayers are being askd to aid other wealthy bankers. Getting the full $700 billion, without an encumbrances, has become almost impossible politically in Congress.
The proposal now being considered would allow $250 billion immediately followed by another $100 billion for a total of $350 billion. What happens to the second $350 billion is sure to be the subject of intense bargaining still with Treasury. But lawmakers signaled that Congress would have the authority to deny any more money — although it would have to overcome a presidential veto to do so.
Apart from Treasury, much will depend on how the markets react to this phased-in approach to the funding.
In testimony this week, Paulson and Federal Reserve Chairman Ben Bernanke have emphasized that the government will proceed carefully—suggesting that not all the money is needed up front, in fact. But the administration and Federal Reserve officials argue that the psychological impact of the $700 billion commitment is important in itself, and Treasury will want to be sure it has access to the second $350 billion.
The cost debate illustrates just how nuanced the massive intervention will be. Paulson has often stumbled this week when trying to describe its intent, and the clearest voice has been Bernanke, a former college professor who casts the whole effort as an unprecedented experiment in “price discovery” that will add not just capital but also precious knowledge to jump start the credit markets.
With the bust in the U.S. housing bubble, mortgage-related securities are caught in a vicious downward cycle, commanding only “fire sale” prices, Bernanke says. The government purchases, through a series of novel auction mechanisms, will help the market value these assets, he says. And this could be the spark needed to get markets working and the economy’s engine turning over again.
This explanation is very different from the “bailout” imagery that surrounds the debate. And the great challenge for both sides has been to find some path in between these two poles—able to satisfy the anger voters feel for Wall Street but also leaving enough room for Bernanke’s experiment to function.
One issue where this comes up is the question whether Treasury should demand warrants or options to hold stock in the companies—a way, perhaps, to turn a profit for taxpayers in the future. Many Democrats argue that this is only fair given the risk the Treasury is assuming by buying up the bad debts. But Bernanke worries that it will be seen as a punitive step and discourage companies from participating –and thereby reduce the competition in the market.