Bailout push hits fever pitch; executive pay deal reached

WASHINGTON -- Treasury Secretary Henry Paulson agreed to congressional demands Wednesday to limit the pay of executives whose firms benefit from any financial market bailout, even as Democrats and Republicans pressed for additional concessions and the White House mounted an all-out lobbying press to secure a deal.

Several lawmakers said they were hoping to vote on a version of the Treasury Department's $700 billion plan by Sunday at the latest, concerned about a negative market reaction if they didn't reach agreement by the start of business next week.

Democratic leaders noted growing consensus in areas including tougher oversight and ensuring that taxpayers benefit from any plan through strategies such as federal ownership of corporate stock. But Sen. Richard Durbin, D-Ill., said the White House continued to push back against congressional efforts to shrink the size of the program or release the money more slowly, as well as his proposal to let judges write off mortgage debt in bankruptcy cases. Republicans also proposed modifications.

While many Democrats want to break the $700 billion into installments or take other steps to reduce the size of the massive plan, Durbin and others said Paulson and Federal Reserve Chairman Ben Bernanke have resisted the efforts in an meetings with lawmakers.

"There's a shock and awe aspect to this, a feeling it has to be a significant size" to have a market impact, Durbin said.

Under the plan, the Treasury Department would buy troubled mortgage loans and other debt securities now held by financial companies. The department could later re-sell them. The proposal is designed to set a floor under asset prices, including house prices; restore market confidence; free up bank capital; and ensure that credit remains available to businesses and consumers.

Many in Congress pleaded for more time to study the bill, look at possible alternatives and explain the economic stakes to outraged voters. Lawmakers say they've been flooded with e-mails and phone calls opposing what they call a taxpayer-funded Wall Street bailout. The White House, which delivered the plan Saturday to Capitol Hill as a bare-bones, three-page document, has been pushing for a vote by the end of the week.

"This notion that we would approve this bailout — $700 billion — today or tomorrow is irresponsible," says Rep. Lloyd Doggett, D-Texas. "We need to move expeditiously, but we need to look carefully at this question of why we would shift all the cost to the people that weren't at the party."

Further ratcheting up the political and economic stakes, Republican presidential nominee Sen. John McCain, R-Ariz., offered to suspend his campaign, cancel Friday's debate against Democratic nominee Sen. Barack Obama, D-Ill., and return to Washington to broker a final deal.

Senate Minority Leader Mitch McConnell, R-Ky., laid out four principles for a deal with the White House: a limit on executive pay, more protection for taxpayers, a guarantee any possible profits from asset sales be devoted to deficit reduction, and greater transparency.

Testifying before Congress for a second straight day, Bernanke and Paulson tried to make the case that the plan was crucial for protecting the economy from a potentially catastrophic credit crisis that could impair growth for years.

Paulson told the House Financial Services Committee that the administration, after resisting for days, would accept a congressional demand to limit the pay of executives whose companies benefited from the rescue plan.

"The American people are angry about executive compensation, and rightfully so," he said. "Many of you cite this as a serious problem, and I agree. We must find a way to address this in the legislation, but without undermining the effectiveness of this program."

President Bush in a televised address to the nation, warned the country could face a deep recession without his plan. He also endorsed limits on executive pay and some of the other principles Democrats have proposed.

The details of any such proposal are still being worked out.

Bernanke, who appeared at two committees during the day, told lawmakers the nation is experiencing the "most significant financial crisis in the postwar period," and stressed that problems in financial markets were already affecting consumers and businesses. Among the impacts: higher borrowing costs and reduced availability of mortgages and student and small-business loans.

In language aimed at Americans watching the testimony on television as well as lawmakers in the room, Bernanke, a former Princeton economics professor with special expertise in the Great Depression, painted the potential impact of the credit crisis in simple terms. If funds are tight, people have a harder time borrowing money to buy a car. If people don't buy cars, auto companies have less demand. If auto companies have less demand, they don't need as many workers.

"The effects are very direct," he said. "The credit system is like the plumbing: It permeates throughout the entire system. And our modern economy cannot grow, it cannot create jobs, it cannot provide housing without effectively working credit markets."

But when asked point-blank by Sen. Sam Brownback, R-Kan., whether the economy is headed toward a second Great Depression, the Fed chairman stopped short of claiming that.

Pressure from both sides

For the most part, it seemed lawmakers were afraid to vote for the bill, yet afraid to vote against it.

Rep. Buck McKeon, R-Calif., said he was ready to oppose the plan before Vice President Cheney, Fed Governor Kevin Warsh and other administration officials briefed House Republicans, laying out the consequences of a credit crash in stark terms.

McKeon called a local banker in California, who told him that while his bank and other small lenders were healthy, they were feeling the fallout from problems at major lenders. The Federal Deposit Insurance Corp., facing rising bank failures, has increased deposit insurance rates and tightened loan standards.

McKeon is still undecided, concerned about major issues such as who would be named to run the massive asset-purchase program, how assets would be priced and whether there would be adequate controls to prevent corruption and waste in the $700 billion program.

"If it is as bad as they're (White House officials) saying and we don't do something, the whole country suffers. The whole world suffers," McKeon says.

The problem is that no one, including Bernanke and Paulson, knows exactly what will happen if Congress doesn't act, says John Hancock Financial Services chief economist Bill Cheney.

In a worst-case scenario, confidence "unravels completely," Cheney said, leading to a run on banks similar to that seen in the movie It's A Wonderful Life. Even though most bank deposits are insured, "The fact is, in the short run, there isn't enough money to pay off everybody if everybody shows up at once."

What's the likelihood of that happening?

"It's incredibly unlikely," Cheney said. "But very unlikely is a lot less confident than I would have been a month ago. I would have said that it is inconceivable, that is never going to happen."

An analysis by Moody's Economy.com laid out a series of potential problems if the rescue were to fail and the credit system froze up, including rising odds that global investors would be less willing to buy U.S. securities and other assets, a possible steep fall in the value of the dollar, and tight credit to businesses and consumers. That could lead to something like Japan's so-called lost decade of slow growth, a reference to the 1990s.

Cost impossible to determine

In testimony to the House Budget Committee, Peter Orszag, head of the non-partisan Congressional Budget Office, said it is not possible to give a solid estimate of the overall cost of the plan, though over time it should cost less than $700 billion. If the Treasury were able to buy assets at a low price and sell them for more later, taxpayers could benefit. On the other hand, the government could get stuck with overpriced goods.

Orszag pointed out that intervention on such a massive scale carries some risks. Costs will be shifted to taxpayers, while some larger institutions, which may be carrying assets on their books at inflated prices, could fail if Treasury purchases effectively set a lower market price for the assets they hold.

"More broadly, there is an inherent tension between minimizing the costs to taxpayers and pursuing other policy goals," Orszag said.

Bernanke pointed out that Congress shouldn't look at it as spending $700 billion when the price tag would likely be far less. "It's not an expenditure, it is an acquisition of assets," Bernanke said. "That does expose the taxpayer to significant risk, there's no question about it. We don't know what the long-term cost or benefit will be. But it is certain to my mind that if there is some loss, it will be much less than $700 billion. It will be a percentage of that."

Jerry Howard, executive vice president of the National Association of Home Builders, said his members held an emergency meeting Wednesday and voted to mount an all-out lobbying effort to pass the bill. The builders will put off, for now, plans to seek tax breaks for first-time home buyers that the industry considers vital to rebuild business.

Howard says some builders who are up to date on loans for land acquisition and housing development are getting calls from nervous bankers exercising clauses allowing them to call the loans.

"You have sort of a balloon that's being squeezed at both ends and is being ready to burst," Howard says. "Members are going out of business on a daily basis now. Our first priority is to shore up the financial system as a whole."