“I can’t invent votes,” House Republican Leader John Boehner warned the administration about the lack of support in his conference for the massive government intervention. And House Financial Services Committee Chairman Barney Frank (D-Mass.) angrily accused House Republicans — with the tacit support of Republican presidential candidate John McCain — of crafting an alternative to undercut Treasury Secretary Henry Paulson.
Both McCain and his Democrat rival, Sen. Barack Obama, left without any joint endorsement. A beleaguered President Bush had to struggle to maintain order and reassert himself. And when Democrats left after the meeting to caucus in the Roosevelt Room, Paulson pursued them, begging that they not “blow up” the legislation.
The former Goldman Sachs CEO even went down on one knee as if genuflecting, to which Speaker Nancy Pelosi (D-Cal.) is said to have joked, “I didn’t know you were Catholic.”
The White House meeting had been called at the urging of McCain, but Democrats made sure Obama had a prominent part. And much as they complained later of being blindsided, the whole meeting turned out to be something of an ambush on their part—aimed at McCain and House Republicans.
“Speaking professionally,” said one Republican aide, “They did a very good job.”
When Bush yielded early to Pelosi and Senate Majority Leader Harry Reid (D- Nev.) to speak, they yielded to Obama to speak for the assembled Democrats. And it was Obama who raised the subject of the conservative alternative and pressed Paulson on what he thought of the idea.
House Republicans felt trapped—squeezed by Treasury, House Democrats and a bipartisan coalition in the Senate. And while McCain spoke surprisingly little after asking for the meeting, he conceded that it appeared there not the votes for the core Paulson plan without major changes.
Within hours at the Capitol Thursday night, meetings were called to try — in Reid’s words – to "put the train back on track.”
Paulson arrived near 8:40 p.m. but without Federal Reserve Chairman Ben Bernanke, who supports the secretary but appears to want to stand clear of the negotiating session. Democrats could very well feel stronger, and more united after the session. But the wild session left doubt about the ability of Congress to move quickly on the matter, even after leaders of House and Senate banking committees reached a bipartisan agreement Thursday on the framework for legislation authorizing the massive government intervention.
Democrats may feel stronger and more united after the White House session. But the wild session left doubt about the ability of Congress to move quickly on the matter, even after leaders of the House and Senate banking committees reached a bipartisan agreement Thursday on the framework for legislation authorizing the massive government intervention.
The whole sequence of events confirmed Treasury’s fears about the decision by Bush, at the urging of McCain, to allow presidential politics into what were already difficult negotiations. And while the markets were closed by the time the meeting ended, Friday could bring turmoil, and there will be immense pressure now by Treasury to get back on track before Monday.
McCain could feel that same pressure. Having called for the meeting, he will have to show if can deliver the votes of House Republicans, many of whom have been leery of him in the past. Mindful of this, the senator’s campaign issued a brief statement an hour after the breakup of the meeting.
“We're optimistic that Sen. McCain will bring House Republicans on board without driing other parties away, resulting in a successful deal for the American taxpayer.”
But House Republicans predicted that the bill now may have to move first in the Senate, where it has more bipartisan support. And one outside option would be to add the package to a must-pass year-end spending bill needed to keep the government funded after Oct. 1.
Paulson was left feeling bruised on two fronts. He was not part of the Capitol discussions in the morning, which stretched to nearly three hours and will now require extensive follow-up with Treasury. At the same time, Frank feared McCain was undercutting Paulson by appealing to conservatives in the House.
“McCain and the House Republicans are undercutting the Paulson plan, talking about a wholly different approach,” Frank said prior to the meeting. And this was very much the line of attack at the White House: “This is the presidential campaign of John McCain undermining what Hank Paulson tells us is essential for the country.”
Wisconsin Rep. Paul Ryan, the ranking Republican on the House Budget Committee and one of the authors of the conservative alternative, said that McCain had yet to sign onto the proposal. But Ryan confirmed that he and other House Republicans had met with the Arizona senator on the issue prior to the White House meeting in Boehner’s office.
“Our goal is not to derail. Our goal is to break the logjam. It’s a Plan B if Paulson can’t pass,” Ryan said. “This is such a crisis I’m not going to draw some line in the sand. We can’t leave without doing something, but we don’t think the votes are here for Paulson.”
From Frank’s perspective, this can be a self-fulfilling prophecy since Republicans will be able to peel off the administration plan and claim they are still taking action. “Nancy is not going to pass a bill with Republicans having an excuse to vote against it,” Frank said of Pelosi. And given the cost of the Treasury plan, Democratic leaders have warned that they will want at least a healthy Republican showing of 80 to 100 votes if they are going to ask their members to vote with the president.
Frank is among those members closest to Paulson. And while the secretary wasn’t included in the Capitol meeting earlier in the day, the House chairman and leading senators in both parties saw those talks as providing a real bipartisan foundation for progress this weekend.
“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.
Prior to the White House meeting, Sen. Bob Bennett (R-Utah) predicted legislation could be finalized in time for Congress to act this weekend. 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, but the agreement was a step forward.
“There are things they won’t be comfortable with — obviously there was a lot of give on both sides,” Gregg said. “ I think they ma 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.”
Paulson had 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 asked to aid other wealthy bankers. Getting the full $700 billion, without any encumbrances, has become almost impossible politically in Congress.
The proposal agreed to in the Capitol meeting 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 through a joint resolution — but that 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 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 bursting of 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 toward 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.