Bipartisan Agreement Leaves Out Working Families; Awards Bankers Trillions to Prop Up Financial System

Members of Unite Here! labor union marching in support of SB 1306 at the State Capital in Lansing, Michigan. The bill would impose a two-year moratorium on foreclosures in the state. (Photo: Alan Pollock).
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SEPTEMBER 25, 2008, 2:00 P.M. ET

Agreement Reached on Bailout Ahead of High-Level Meeting

Proposal Breaks $700 Billion Into InstallmentsBy GREG HITT,

DEBORAH SOLOMON and DAMIAN PALETTA
Wall Street Journal

A bipartisan group of House and Senate lawmakers left a two-hour-plus meeting in the U.S. Capitol on Thursday saying they have a "fundamental agreement" on a $700 billion plan to bail out U.S. financial markets.

The lawmakers didn't offer details of the plan, but the proposed bill would approve the fund, but would pay the money out in installments, with $250 billion in bailout funds available immediately, people familiar with the matter said.

Lawmakers also agreed that limits on "golden parachutes" and use of warrants would apply to all companies, these people said. However, changes to bankruptcy laws still unresolved. The details still need to be ironed out with the White House.

Republican Sen. Robert Bennett of Utah expressed optimism that lawmakers have a "plan that will pass the House and Senate."

Rep. Barney Frank, second from left, and Sen. Chris Dodd, third from right, spoke with reporters after congressional leaders said an agreement was reached on a bailout package.

"We came to agreements on a lot of the important issues," House Financial Services Chairman Barney Frank (D., Mass.) said at a press conference featuring most of those who attended the meeting. Sen. Bob Corker (R., Tenn.) said: "I believe that we will pass this legislation before the markets open on Monday."

Frank's Senate counterpart, Banking Committee Chairman Christopher Dodd (D., Conn.) said lawmakers plan to "act expeditiously" to pass legislation allowing the federal government to buy billions of dollars in distressed assets.

The final legislation is expected to vastly expand on a Treasury proposal issued last weekend. It potentially includes some limits on executive compensation for companies that sell their assets to the government and some way for the government to recoup the money it spends to help free illiquid credit markets.

"I believe we are on track to pass it," Mr. Frank said following the meeting.

Lawmakers said they plan to talk to members of their parties in both the House and Senate before a meeting scheduled at the White House later Thursday to discuss the legislation with the Bush administration.

A dramatic flurry of activity, including a prime-time address by President George W. Bush late Wednesday, appeared to galvanize efforts to finalize the administration's $700 billion financial-markets bailout, despite continuing tensions and an occasionally heated debate on Capitol Hill.

Democratic leaders hoped to nail down details of the measure Thursday, ahead of an extraordinary summit meeting in the afternoon at the White House, which will bring together Republican and Democratic presidential nominees, along with Mr. Bush and top leaders from Congress.

Hours before the meeting, the White House said "significant progress" has been made. "We have made progress every day, and we are closer today to a conclusion than we were yesterday," said White House spokeswoman Dana Perino.

Sen. John McCain (R., Ariz.), Sen. Barack Obama (D., Ill.) and congressional leaders from both parties will meet Mr. Bush at the White House late Thursday afternoon. The meeting will be a chance to "have everybody get together and hopefully start driving to a conclusion," Ms. Perino said. "I can't tell you if we would have a final deal by then, or [if] it would emerge right after that."

Sens. McCain and Obama addressed the issue at a Clinton Global Initiative event Thursday morning. Sen. McCain said "the whole nation was in danger" and that time was short and doing nothing wasn't an option. Sen. McCain said he would carry to Washington five improvements to Treasury's rescue plan: greater accountability from a bipartisan board with oversight; a path for taxpayer recovery of funds; complete transparency in review of legislation -- all details made available online; absolutely no earmarks to be included in bill; and curbs on Wall Street executives' ability to profit from the bill.

Sen. Obama said that a "failure to act" on the bailout plan would have "grave consequences." But he said that it is "outrageous" that taxpayers must bear the burden for Wall Street "greed and risk," adding that the American people must not reward Wall Street executives.

Much is still uncertain and the contours of a likely bill could change. But the outlines of a potential compromise began to emerge late Wednesday after congressional leaders started considering restrictions on the bailout plan that could break the pool of money into installments.

Former New York City Mayor Rudy Giuliani says a Wall Street bailout is urgently needed, but should be followed by an investigation.

A likely bill would include limits on executive pay in situations where the government puts a large amount of money into a failing institution. In certain cases, the government could receive warrants that would give it the right to acquire shares in the company. Also included is beefed-up oversight through the Government Accountability Office, an investigative arm of Congress.

Likely not included is a controversial idea to let judges alter the terms of mortgages during bankruptcy proceedings.

"Without immediate action by Congress, America could slip into a financial panic and a distressing scenario would unfold," Mr. Bush said in a 12-minute address in which he warned in stark language about the danger of delay. Mr. Bush endorsed several of the changes that have been demanded in recent days from the right and left. He said the bill "should be enacted as soon as possible."

The basic building blocks of the bailout plan as initially proposed remain intact: Democratic leaders are still proposing to authorize Treasury to borrow up to $700 billion to buy hard-to-sell assets from troubled financial institutions. The goal is to calm financial markets by removing the toxic assets, mostly mortgages, which lie at the heart of the crisis. If a final deal is struck, it would represent one of the biggest government bailouts in U.S. history.

Whether the Bush administration will agree to the entire Democratic wish list of provisions isn't clear. Its room to maneuver will be limited, having urged Congress this week to act quickly to forestall financial calamity.

One scenario being discussed by Democrats would be to establish benchmarks to periodically measure the bailout's performance. Those benchmarks would have to be met before further allotments of government money could be used -- in effect, potentially breaking the bailout funds into several installments. The administration doesn't want Congress to split up dispersing the funds, particularly if that would require returning for continual congressional approval, according to people familiar with the matter.

There is less resistance to the idea of having an independent oversight board approve the installments, depending on who sits on the board. But the hope within the administration is that beefed-up oversight will negate the idea, these people said.

Congressional officials don't expect to forge a final deal Thursday morning. But they do expect to sort through remaining details on a handful of issues, including executive-pay limits, housing, equity stakes and the plan to have staged drawdowns on the $700 billion. That would set the stage for a final compromise to be pieced together at the White House later in the day, if all of the parties invited to the meeting can be satisfied.

New Wrinkle

Unknown still is the reaction from rank-and-file lawmakers, particularly conservatives, many of whom have been strongly opposed to the plan. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke testified once again before skeptical members of Congress -- both Democrats and Republicans -- following a similar hearing Tuesday in the Senate.

Adding to the pressure on lawmakers to do a deal, billionaire investor Warren Buffett said he wouldn't have considered investing in Goldman Sachs Groups Inc., a move he announced Tuesday night, if he didn't think the bailout would be approved. "I really do think Congress will do the right thing, when it's terribly important, and they will do it fast," he said. "They will haggle but they have the national interest at heart."

The idea to set benchmarks to measure the plan's success was a new wrinkle that emerged Wednesday, when Democratic party leaders started debating the possibility. Any benchmarking plan, however, itself remains a rough outline. A key issue would be deciding how to judge whether the benchmarks were being met, and whether that authority would reside with the administration or with an independent board that would be created to oversee the rescue plan.

Democratic leaders have discussed holding a quick vote on perhaps one-third of the funds sought by the administration, with a second vote later on the rest. That option is considered less likely, although congressional aides and lawmakers cautioned that nothing has been ruled out.

Amid uncertainty during the day over the continued political wrangling in Washington, investors around the world snapped up short-term Treasury bills, one of the safest investments around. The yield on the one-month T-bill fell to 0.01% early Wednesday morning -- meaning that, in return for safety for their money, investors were willing to accept almost no return whatsoever -- and ended the day at 0.2%.

Republicans are concerned about the overall cost of the plan, and the broad powers it would give the Treasury to intervene in the marketplace. Rep. Eric Cantor, a conservative Republican from Virginia, has floated the idea that the government could insure mortgage assets, rather than buying them outright. Such a move would essentially provide a government guarantee for the assets at a certain price.

Treasury had considered a similar plan but rejected it in favor of buying the distressed assets. Mr. Paulson viewed that as a quicker and more efficient way to get to the root of the problem, according to people familiar with the matter.
Democrats, meanwhile, are pressing for action to help homeowners and families in dire straits, not just Wall Street bankers.

It's impossible to handicap the bill's actual prospects, in part because lawmakers are grappling with the complicated political calculus created by the November elections. Still, party leaders have said they're committed to passing the bill in some form.

Addressing the Joint Economic Committee, Bernanke discusses the reasons behind the agency's actions concerning Fannie Mae and Freddie Mac as well as AIG.

Democratic and Republican leaders prepared to work though the weekend and into next week if necessary. "We'll finish it when it's ready," said House Speaker Nancy Pelosi, a California Democrat. She has been buffered by anger within the House Democratic Caucus over the costly bailout Mr. Bush is demanding. Some Democrats don't want to do a deal with the White House, but she has pressed forward. "We're going to get it right."

The White House and its Republican allies have made an uneasy peace with Democratic leaders of the House and Senate, who have committed to carry the proposal forward. Late Wednesday, Speaker Pelosi and House Minority Leader John Boehner (R., Ohio) issued a joint statement vowing to "work cooperatively and on a bipartisan basis." The two party leaders stressed their commitment to improve oversight of the bailout and protect taxpayer interests.

But in addition to the new changes they are seeking, Democrats are also urging the White House to deliver Republican votes for the package. "We are not taking ownership of this," Mrs. Pelosi said.

The risk for the White House is that Mr. Bush, with his popularity at 30%, just a few points above its all-time low, won't be able to seal the deal. In that case, the administration might have to make more significant concessions to Democrats, in turn further endangering Republican support.

Give-and-Take

In give-and-take on Capitol Hill Wednesday, Mr. Paulson signaled his intention to relent on another key Democratic demand: that limits should be imposed on the compensation of executives at firms participating in the program. Mr. Paulson had previously argued against pay limits, suggesting they might deter companies from participating in the bailout. That argument proved to be a political loser.

"We must find a way to address [executive pay] in the legislation, but without undermining the effectiveness of the legislation," Mr. Paulson told the House Financial Services Committee.

Mr. Paulson has publicly resisted the notion of dividing the $700 billion plan into several parts, saying markets need a big number to instill confidence that the plan will succeed. Privately, however, there was growing acknowledgment within the administration Wednesday that the money might be released in stages.

One big concern: Having to continually ask Congress for money would breed uncertainty in the markets and potentially undermine the program, a senior administration official said.

Another top administration official suggested the administration is willing to support the idea, so "long as it's done in a way that doesn't render the program ineffective."

Lawmakers continued to unload their frustration on Messrs. Bernanke and Paulson during hearings Wednesday. Mr. Bernanke, stepping beyond his usually cautious and measured tone, upped the ante, warning the nation faced "grave threats to financial stability." He detailed how nearly every sector of the economy, already under intense stress, would worsen if faced with further financial-market uncertainty.

—Michael R. Crittenden, Henry Pulizzi, Sudeep Reddy, John D. McKinnon and Michael R. Crittenden contributed to this article.Write to Greg Hitt at greg.hitt@wsj.com, Deborah Solomon at deborah.solomon@wsj.com and Damian Paletta at damian.paletta@wsj.com