The Bailout Brawl Rages On

Update (12:37 a.m.): It's a secret deal! Until they get it down on paper overnight, we won't know what they agreed to.

Except, except. We imagine that that the staff members and lawmakers will quickly be leaking details to reporters. (Leak it to us! Clusterstock@gmail.com or 646-526-FEAR)

Update (12:35 a.m.): Nancy Pelosi speaks first. She says we have a deal. Harry Reid is up next. He credits Pelosi with coming up with a new idea in the final hour but doesn't even hint at what that is! Are the Republicans going to let Pelosi claim the credit? Or are they convinced it's a terrible idea and want her to take the blame? What the heck is this brilliant new idea anyway?

Hank Paulson sounds less reassuring, mentioning that there is lots of work left to be done and concluding "so far, so good."

Gregg just sounds glad to be able to go to bed. Roy Blunt admits he hasn't talked to the House Republicans but seems confident. Blather from Dodd about how "unpleasant" having to "go through all this" has been.

Barney Frank says he's looking forward to not having to speak to all the lawmakers around him. They all agree. Chuckles all around. Old Barney's always good for a moment of levity.

Update (12:27 a.m.): They're walking toward the microphones together. Looks like we have a deal because they're all together. Nancy Pelosi in front, followed by Chuck Schumer, Chris Dodd, Judd Gregg, Hank Paulson, Roy Blunt, Harry Reid. Democrats, Republicans, Senators, House members, Treasury Department. That sure looks like a deal.

Update (12:22 a.m.): The meeting has broken up, and some kind of announcement is apparently imminent.

Update (12:15 a.m.): A person familiar with the progress of the negotiations says describes the progress over the last hour as "significant." Most negotiating plan to announce something shortly. The person warns, however, the there may be a bit of "room fatigue" setting in, as negotiators drop objections out of exhaustion, making an agreement seem closer than it actually is. Many lawmakers, particularly GOP House members, who are not taking part in the talks will still need to be consulted.

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Update (12:00 a.m.): Still no deal reached! So much for the much anticipated midnight agreement.

CNN just reported that Warren Buffett told lawmakers that if they don't reach a deal soon we'll face "the biggest meltdown in American history.

Update (11:30 p.m.): The WSJ reveals that the negotiators have been calling so-called financial experts around the country for advice. That's right: they've chose to use the "dial a friend" option.

"We've had Warren Buffett on the phone tonight, other experts that we've been consulting," Senator Kent Conrad said.

He added that there were only a "handful of issues" left. Is that true? It seems like we've had bucket fulls of new issues arise tonight. Can the negotiators really have cleared all these new issues with there House and Senate colleagues? Remember, these are the same people who told us we had a deal days ago.

We're now nearing the 10th hour of negotiations.

Update (10:00 p.m.): Despite the happy talk about getting closer to a deal, all the new proposals we keep hearing about suggests the opposite. Rich Lowry, the editor of National Review, thinks things are falling apart on Capitol Hill: "Just talked to a friend who is plugged-in to all this who wants a deal and has tended to think all along that there will be a deal. Now he’s not so sure. He thinks the wheels are coming off. House Republicans want their insurance as a mandatory thing rather than an option, while the House Democratic caucus is imploding and pulling the deal far to the left. It’s getting ugly."

Update (9:45 p.m.): Politico reports that there is growing interest in imposing a financial company transaction fee to pay for the bailout. Paulson is said to be open to the idea, although exactly which transaction would be subject to what kind of fees remains vague.

On a lighter note, we have more details on who is eating what. Democratic staffers ordered burgers from Five Guys. Paulson's crew, which is set up in in othe offices of Minority Leader John A. Boehner, across the hall from Pelosi's office, ordered pizza.

An aide to Pelosi collected BlackBerrys from the staffers meeting in her office so that no details would leak out.

Update (9:20 p.m.): No wonder why things keep getting more complicated! The New York Times is reporting that nine Democrats showed up to the negotiations, surprising Republicans who sent only Rep. Roy Blunt and Senator Judd Gregg. At one point Democratic Sentor Max Bacchus started shouting at Paulson over executive pay caps. (Paulson is presumably smart enough to know this would mean Wall Street executives wouldn't play ball.) Latest word from the NYT: "lawmakers said they hoped to reach an agreement by Sunday night, in time for the opening of the markets in Asia." Hoping, of course, is not a strategy.

Update (9:10 p.m.): The Wall Street Journal reports that the mood is optimistic. But don't expect anything soon. Cosi just delivered a bunch of food to Nancy Pelosi's office. The key sticking point seems to be the Republican insurance program.

Several previously unheard of provisions are under consideration, according to the Journal.

Financial Stability Fund. Modelled on the commercial banking industries support for the FDIC, this would involve firms that are deemed 'too big to fail' paying into an insurance pool which could be used to rescue troubled financial firms.

Taxing 'Excessive' Salaries. In what seems to be a compromise move on executive salaries, this would eliminate the tax deductions for companies on executive compensation for top officers that is above $400,000. This would allow companies to continue to pay large salaries and eliminate the incentive for executives to avoid participating in the rescue. It would, of course, cost firms and taxpayers more.

Meanwhile, the Treasury is reportedly pushing back on attempts to stagger the rescue funds into three tranches. Paulson and his buddies want at least $500 billion in the initial tranche.

Update (8:40 p.m.): The meeting on Capitol Hill reconviened this evening but the situation is becoming more complicated not less. Senator Kent Conrad, who runs the Senate Budget Committee, emerged from the meeting and told reporters that "We've got several big issues" that have not been resolved.

House Speaker Nancy Pelosi has added a twist to the negotiations by introducing a new proposal that would allow the government to 'recoup' losses from securities or mortgage bought from financial firms by charging the firms some kind of fee. We described this proposal, which originated with conservative Democrats, earlier today. (See below.) The provision could be highly problematic as it adds complexity and unpredictability to the deal, leaving financial firms on the hook for the downside of the assets that have been dragging them down for the past year.

Update (5:40 p.m.): The point man for the Republican House members, Roy Blunt, just left House Speaker Nancy Pelosi's office. He walked right past the waiting press hordes without offering any comment. The official word is that those meeting, including Barney Frank, Senators Chris Dodd and Judd Gregg, Treasury Secretary Hank Paulson, Blunt and Pelosi, are taking a break.

Apparently, it's not just a break because it's dinner time. House Democrats are meeting in the basement of the Capitol building. Blunt will be speaking with Eric Cantor, who has been taking the measure of the House Republican rank and file. Gregg is presumably briefing fellow Republican Senators, while Dodd meets with Democratic Senators. Paulson is probably on the phone with Robert Steele, his former deputy at Treasury who is now the head of Wachovia, cursing the fact that he has to deal with all this damned poliiticians while another U.S. bank teeters on the edge of failure.

The meeting is scheduled to resume within an hour.

Earlier: Negotiations over the Wall Street bailout proposal continue this afternoon on Capitol Hill. After the staffers worked through most the night, leading Republicans and Democrats say they hope to arrive at an agreement by tomorrow for a vote on Monday. It is increasingly likely, however, that markets around the world will open with only the promise of a bailout agreement but without actual legislative approval.

Here’s a rundown of recent developments.

Last Night Was A Late One On Capitol Hill.

The Congress was supposed to adjourn, with lawmakers heading home to campaign for re-election. Instead, staffers worked through the night and Senators and House members are meeting this afternoon. Senate staffers worked until 3 am, while House staffers knocked off before 2 am. John McCain returned from his Oxford, Mississippi debate against Barack Obama at 4:30 am. He’s expected to take part in negotiations today but will stay behind the scenes, away from Capitol Hill at his Arlington, VA campaign headquarters.

Closer My Bailout To Thee?

The bitter partisan fighting that broke out late last week has been tempered and its dimensions have changed. Let’s review the politics so far.

• Democrats lard bailout with leftist earmarks. Originally, Democrats reacted to the Treasury Department’s demand for a simple grant of unchecked authority to expend $700 billion to rescue financial institutions by attaching a number of restrictions as well as pet projects to the proposal. Two of these were regarded as poison pills by the Republicans—namely, the requirement that the government use profits from the sale of securities to fund what the GOP regard as left-wing housing groups and broadening judicial discretion to modify mortgages in bankruptcy cases to make things easier for debtors.
• Pro-Labor Provisions. Some pro-labor Democrats also began maneuvers to include a role for organized labor in the oversight of the financial firms benefiting from the bailout. Labor unions would be guaranteed seats on the independent oversight board and seats of corporate boards of firms taking government money, positions which would empower them to make demands on the management of financial institutions. These could include restrictions on financing corporate buyouts that result in layoffs, pro-labor covenants in credit agreements and a host of other things on the labor union wish-list that have largely been defeated in the now ailing ‘shareholder democracy’ movement.
• Fear of a Democratic Bailout. The Democrats, who control both the House and the Senate, could have passed their bill without a single Republican vote. A filibuster was never in the cards, and Bush would likely have signed the bill into law despite the objectionable Democratic additions. Democrats, however, knew the bailout is very unpopular with voters—recent polls show only 30% support for the bailout—and feared passing it without Republican support. If the rescue plan failed, it could be blamed on the Democrats. If it worked, the public might still continue to regard it as an unconscionable subsidy—a bailout for billionaires.
• Republicans See An Opening. Republican lawmakers saw little political upside to supporting the legislation, especially since Democrats such as Barney Frank and Chris Dodd were poised to claim credit for any success of the bailout. At best, Republicans would simply provide political cover for the Democrats while gaining nothing. On the other hand, opposing the bailout put the Republicans in the enviable position of siding with “Main Street” against “Wall Street.” For a party often accused of being the handmaiden of “big business” this was irresistible.
• Free-Market Objections. Republicans had more than cold political calculation at stake in considering whether to support the bailout. It offended free-market types who fear the government assistance could deepen the financial crisis by further obscuring market pricing processes. Many also believed that the bailout would set a precedent for further bailouts of the automakers, airlines and troubled manufacturers. The bailout itself seemed to lend credence to the Democratic position that markets cannot operate efficiently without strong government oversight and support. With the addition of the Democrat's favorite provisions to the bill, Republican resistance grew.
• A Choice Not An Echo. Despite all this, Republicans were still fearful of being seen as the “Just Say No” party. Many remembered the party being blamed for shutting down the government in 1995—although, contrary to media report, the government continued to function throughout the affair—and feared being blamed for shutting down the financial system. Eric Cantor, the number three Republican in the House, proposed a Republican alternative to the bailout—offering government insurance for troubled mortgage based assets in exchange for a fee from financial firms.
• Bush Faces The Nation. George Bush’s decision to deliver a national address on the bailout was largely intended to alleviate Democratic fear of being credit or blamed entirely for the bailout. Bush was essentially writing the Democrats a CYA mash-note by addressing the nation. What’s more, Democrats believed that Republican resistance would wither with George Bush as the public face of the bailout. They underestimated the depth of ill-will towards the lame-duck Bush administration among many Republican lawmakers, however. The next morning, Republicans on Capitol Hill began to show signs they weren’t going to go along with the Democrat and White House proposal.
• A Democratic Clawback Propsoal. Conservative Democrats on Capitol Hill added confusion to the mix by proposing that the bailout include a right for the Treasury to “recoup” any losses from buying troubled assets from financial firms. Firms that sell loss-making assets to the Treasury would be subject to a 2% recoupment tax. This proposal does not have widespread report, and would probably make any financial firm hesitant to participate in the plan. From a shareholder perspective, it would create a ongoing risk of 2% drag on after-tax earnings. It would be a short-seller’s dream, as the shorts worked to figure which firms were more likely to get hit by the penalty.
• A False Start Consensus. Democrats rushed to avoid Republican maneuvers against the deal that had been worked out between themselves and the White House by announcing a bipartisan consensus. The Republican leadership in both the Senate and the House initially appeared to support this agreement, only backing away when they realized the depth of the opposition among the rank-and-file.
• The Return of John McCain. Republican presidential nominee John McCain’s return to Washington DC played a critical role in derailing the proposal. The political calculation was all too apparent to the McCain campaign. He encouraged fellow Republicans to drop their support for the bailout. The plan, from the beginning, was to have the Republicans appear to defeat the “Wall Street bailout” and yet still rescue Wall Street with a plan originated by Republicans.
• A Partisan Call For Bipartisanship. This lead to the odd situation late in the week, with Democrats siding with the Bush administration. Democrats found themselves giving voice to bitter partisan attacks on Republican lawmakers and John McCain. Republicans bristled at being pushed to accept the bill, and the Republican leadership grew angry at not being shown the proper amount of deference by Democrats and the Senate. Increasingly the Republicans responded that if the Democrats wanted this so bad, they should just vote for the bailout without Republican support.
• Republicans Return To The Table. On Friday, Republicans began to receive polling data indicating that perhaps they had gone too far in their resistance. The fear of being blamed for the failure to rescue the financial system was becoming a reality. Republicans decided to return to the negotiating table while also mounting a public relations campaign to persuade voters that they were rescuing the rescue with a bill that would better protect taxpayers. Roy Blunt, the number two Republican in the House, was assigned to lead negotiations. Although there was talk of reaching an agreement by midnight on Friday, that was never in the cards. No agreement would be possible before Saturday night, at the earliest, most involved believed.
• A Day Of Bipartisanship. Staffers worked deep into the night on Capitol Hill last night, and the talk was mainly friendly. All sides had been given orders to work toward a deal, hopefully one that could be announced on “Paulson time”—that is, before the Asian markets opened Sunday night. Today, the elected officials—in Beltway speak they call them “the principals”—began meeting to put together a final proposal.
• Republican Senators Pressure House Members. Remarks from Republican Senators today appeared to be an attempt to pressure House Republicans into supporting the bailout, an indication that the Republican rank-and-file resistance continues. Earlier today, Senator Robert Bennett gave dire warnings about the likely failure of another bank if a bailout is proposed immediately. His words are being interpreted as an effort to pressure holdout Republicans in the House to come around to a deal. New Hampshire Republican Judd Gregg also made dire predictions about financial crisis hitting early next week if an agreement on a bailout is not reached.
• Democrats Accept Insurance Proposal But GOP Still Balks. As we reported earlier this afternoon, Democrats appear to have agreed to include the Republican insurance proposal first put forth by Eric Cantor. This seems to have left the Republicans dissatisfied, however. The Democrats would allow the insurance as an option for the Treasury Department while the conservative members in the House want the insurance proposal to be at the core of the bailout.

So where do things stand now?

First, the authority to buy troubled assets—the Troubled Assets Relief Program—remains at the heart of the proposal. Instead of a blank check for $700 billion, however, Capitol Hill is prepared to issue funds in increments. It seems likely that there will be a initial tranche of $350 billion, followed by another tranche of $250 billion which would be issued automatically unless both the Senate and the House call for a halt. The final $100 billion would require affirmative approval by congress. At each step, lawmakers will maintain oversight and the right to prevent the next increment. From the perspective of financial firms, the incremental process will add uncertainty. From the perspective of lobbying firms, it will be a bonanza.

Congress will maintain oversight of the program, requiring the Secretary of the Treasury to regularly brief lawmakers on the bailout. An independent inspector general is likely as well.

The government will apparently be authorized to take equity stakes in firms taking the bailout. This will give the government some upside security in buying troubled assets. If firms make windfall profits by selling bad assets at above market prices, the government will benefit as well. This could, however, drive away shareholders who would face even more dilution. Executives may feel pressure to signal that they will not participate in any asset sales granting the government equity, which could sap the effectiveness of the bailout and increase systemic risk.

Ironically, the least workable provision under consideration enjoys the most widespread support. We’re talking, of course, about executive compensation limits. Both Republicans and Democrats, conservatives and liberals, support the proposal to limit executive pay for firms that participate in the bailout. How to reach such limits remains a bit of a mystery, with some lawmakers giving discretionary authority to the Treasury Department to judge whether compensation is “excessive.” If this provision winds up mostly symbolic and toothless, that would be for the best. Serious limits on compensation would result in most firms declining to take part in the bailout.

The Democrats have apparently agreed to include Eric Cantor’s insurance plan in the bailout but Republican House members continue to push for more. The Democrats imagine giving this as one option for the Treasury Department to use. Republicans fear it will be shelved. The insurance program forms the core of Republican plans to claim credit for creating an improved bailout that protects taxpayer interests.

Democrats appear to have dropped their plans to fund left-wing housing activist groups, modify bankruptcy laws or mandate union seats on boards of directors.

Phew. We’ll keep you posted as we hear more.