By Paul Kane and Lori Montgomery
Washington Post Staff Writers
Friday, September 26, 2008
A renegade bloc of Republicans moved to reshape a massive bailout of the U.S. financial system yesterday, surprising and angering Bush administration and congressional leaders who hours earlier announced agreement on the "fundamentals" of a deal.
At a meeting at the White House that included President Bush, top lawmakers and both presidential candidates, House Minority Leader John A. Boehner (R-Ohio) floated a new plan for addressing the crisis that has hobbled global markets.
Democrats accused Boehner of acting on behalf of GOP presidential candidate Sen. John McCain (Ariz.) in trying to disrupt a developing consensus. The new proposal also displeased White House officials, including Treasury Secretary Henry M. Paulson Jr., who chased after Democrats leaving the meeting and -- half-jokingly -- dropped to one knee and pleaded with them not to "blow up" the $700 billion deal, according to people present at the meeting.
Before the meeting broke up, President Bush had issued a stark warning about the impact on the nation's economy if the measure did not pass. "If money isn't loosened up, this sucker could go down," Bush said, according to one person in the room.
Under the alternative Republican plan, the government would set up an expanded insurance system, financed by the banks, that would rescue individual home mortgages. The government would not have to buy up the toxic mortgage-backed assets that are weighing down financial institutions.
Paulson and Federal Reserve Chairman Ben S. Bernanke had already considered and discarded a similar idea, White House spokesman Tony Fratto said. "I'm not convinced it does what needs to be done for the banking system, and neither is Secretary Paulson or Fed Chairman Bernanke," he said.
Last night, after the White House meeting, Paulson shuttled back to the Capitol for a nearly two-hour meeting with Democrats and Senate Republicans, and the sides began drafting legislation based on the general agreement struck earlier in the day. That effort will continue this morning.
Democrats say they would not approve the legislation without a significant number of Republican votes to share in any political fallout from the controversial proposal, which comes just weeks before the November election. "We are working to try to get this bill ready, but if House Republicans continue to reject the president's approach, then there's no bill," said Rep. Barney Frank (D-Mass.), an architect of the bailout legislation. "We told Paulson the whole thing is at risk if the president can't get his own party to participate."
"We've not seen any way to getting majority [Republican] support," said Rep. Eric Cantor (Va.), a leading Republican vote counter and co-author of the alternative House GOP plan, which would also cut taxes on dividends and capital gains.
The apparent breakdown yesterday followed a lunchtime declaration by Republicans and Democrats in the Senate banking and the House Financial Services committees that they had come to a general accord on many outstanding issues. During a nearly three-hour meeting, lawmakers reached an "agreement on principles."
Under that agreement, the package would be broken into three parts. Paulson would receive $250 billion immediately and $100 billion more upon certification that the funds are necessary. The final $350 billion could be dispersed without additional congressional approval, but Congress would be given 30 days to object.
The agreement calls for strong oversight of the bailout program, including an independent inspector general and regular audits by the Government Accountability Office. It also would require the Treasury to set standards to ban "inappropriate or excessive" compensation for executives at participating firms and establish stronger protections for taxpayers, including a requirement that they receive equity in all participating companies. The latter provision ensures that the Treasury could recover the cash it invests in bad assets if the firms return to financial health.
If the nation profits from the program, the agreement calls for most of the cash to be dedicated to deficit reduction, though a portion would go to funding affordable housing.
Frank said the primary remaining point of contention between Democrats and Republicans is a proposal to give bankruptcy judges new power to modify mortgages for troubled homeowners, an idea that is widely viewed as a bargaining chip. Democratic presidential candidate Sen. Barack Obama (Ill.) has said the provision, which is fiercely opposed by the banking industry, should not be included in the bill.
Meanwhile, House Democrats said they were still considering a separate plan to increase taxes to pay for a portion of the bailout, possibly by taxing stock transfers or levying a "surtax" on millionaires. But Democrats had agreed that any tax increase would not be included in the bailout bill.
Despite those stumbling blocks, Sen. Robert F. Bennett (R-Utah), the chief negotiator for Senate Republicans, said early in the day that he was optimistic. "I now expect we will indeed have a plan that will pass the House, pass the Senate and be signed by the president and bring a sense of certainty to this crisis," Bennett said.
"We've reached fundamental agreement on a set of principles," said Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate banking committee, adding that a bill could pass within days.
Less than 30 minutes later, however, Rep. Spencer Bachus (R-Ala.), who had attended the meeting on behalf of House Republicans, denied that an agreement had been reached. While progress was made on peripheral issues, Bachus said, House Republicans remained adamantly opposed to the central point of the plan: purchasing bad assets from struggling firms.
"There's not a deal. There's not a deal made. There was progress on the issues," Bachus told reporters. He said House Republicans "would prefer a loan where we fix an interest rate or we would prefer insurance" rather than having the government buy up bad assets.
Bachus said many of those ideas were supported by McCain, who returned to Washington yesterday to participate in the negotiations. Bachus said he spoke to McCain on Wednesday, had breakfast yesterday with two McCain advisers and spoke to McCain again immediately after the morning meeting.
But, Bachus said, "John's not trying to call the shots for the House caucus, I can tell you that. He's just opposed to the plan in its present form."
Frank reacted angrily to Bachus's remarks, saying lawmakers had been well on their way toward a bill they could put to a vote and accusing McCain of engineering a breakdown. "This is the presidential campaign of John McCain undermining what Hank Paulson tells us is essential for the country," he said.
Frank was in a fury as he and other Democrats departed for the late-afternoon meeting at the White House, a remarkable event given Bush's efforts to stay out of the presidential campaign.
Despite expectations that a deal was near, Boehner took off in a different direction during the meeting, saying the bailout plan was not gaining traction among rank-and-file House Republicans.
As Obama and Frank peppered Boehner with questions about the new proposal, Bush rejected the idea as a too-broad rewrite of his administration's plan, according to the handwritten notes of one Democrat present.
"Don't start over," Bush said. "Don't start over."
Staff writers Binyamin Appelbaum, Jonathan Weisman and Dan Eggen contributed to this report.