Financial Reform Watch : Financial Services News & Information : Blank Rome Government Relations Lobbying Firm : Government Relations, Corporate Governance : Financial Reform Watch Law Blog

The stock market closed a few minutes ago and today's increase of 485 points in the Dow Jones Industrial Average is indicative of the view that Washington is moving past the shock of yesterday's House vote and towards a new push to enact a financial rescue package.

Key leadership players have been working hard today to rally the troops and change the package in ways that will garner additional votes in the House. The White House conducted a series of outreach calls today to groups ranging from GOP "insiders" to representatives of state and local government and other advocacy organizations. All of this was designed to drive home the point that action is needed on a plan very much like the one put before the House yesterday. Congressional leaders have been doing likewise. Individual Members of Congress -- many of whom have gone home for the two day Rosh Hashanah break -- are also hearing from their constituents. Given the recent tenor of constituent input, that may not be helpful.

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Washington is stepping back from yesterday's debacle in the House of Representatives and taking a deep breath. Yesterday's surprising 205-228 defeat of the financial rescue plan has caused leaders of both parties to assess the situation within their caucuses, and they are thinking about what is required to gain passage of the package. Our first report today will focus on an analysis of the vote yesterday. Our second report will discuss potential changes to the plan that might garner the necessary votes.

Our analysis suggests that if leaders make carefully selected changes to the package, the votes will be there when Congress returns on Thursday. We draw that conclusion after a careful review of the roll call in the House.

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With the whole world watching, the House of Representatives this afternoon rejected the Emergency Economic Stabilization Act of 2008 (EESA) by a vote of 228 to 205, after more than three hours of vigorous debate.

This is despite the fact that the administration lobbied hard for passage of the bill, describing the “profound and devastating” consequences of not passing the financial rescue legislation. The White House argued that the $700 billion should not be considered an expenditure, but as an investment that may be recouped in full or turned into a profit for taxpayers, considering that close to 90 percent of the mortgages backing these securities will not default and asset prices will inevitably rise after prices have been stabilized.

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Today is game day in the House of Representatives as members prepare to vote for or against the Emergency Economic Stabilization Act of 2008 at 1 p.m. Early this morning, President Bush appeared before cameras at the White House, urging Congress to adopt the rescue plan, saying “Every member of Congress and every American should keep in mind, a vote for this bill is a vote to prevent economic damage to you and your community.”

The House went into session unusually early this morning to allow for three hours of debate on the bill. Speaker Nancy Pelosi had indicated yesterday that she would like to hold the vote as early as 11 a.m. The currently scheduled 1 p.m. vote suggests members needed more time to shore up support. One positive sign is that Rep. Paul Ryan (R-WI), the ranking member of the House Budget Committee and a chief architect of the Republican alternative, has announced he will vote for the rescue plan.

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Progress towards action in the House and Senate continues apace. House leaders expect a vote on the Emergency Economic Stabilization Act tomorrow. The Senate will take up the measure as well, but action on Monday may be limited to filing a cloture petition, which would mature on Wednesday. The Senate could vote tomorrow if leaders can obtain a unanimous consent agreement, but that is difficult.

While the bipartisan, bicameral leadership appears united on approving the package, there is enough opposition on the right and left to make things interesting. This is particularly true in the House, where some influential members on both ends of the spectrum are organizing opposition.

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According to our contacts, Congressional leaders do not expect to finish drafting the financial rescue legislation before early this evening. As reported earlier, House Speaker Nancy Pelosi promised to post the final legislation on the Internet by noon today. The timing indicates the House will not vote on the package before tomorrow afternoon at the earliest, given that all sides will need time to review the final package. At a news conference this afternoon, key negotiator Sen. Judd Gregg (R-NH) said he would like to see the Senate vote on Monday. We expect the Senate will vote on the House-passed bill later in the week, following the Jewish holiday. In the meantime, we have received outlines from House and Senate staff privy to the negotiations.

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House and Senate negotiators and the Administration reached a deal overnight on the financial rescue package. Staff has spent a sleepless night drafting and a vote in the House is expected as early a this evening.

Our next report will have more details, but the plan does include the following

• A total of $ 700 billion for investment in troubled assets.
• A phased approach to releasing funds as described in our report last evening.
• A requirement for the president to submit a plan for recouping lost funds if the program does not turn a profit upon the sale of assets.
• Limits on "golden parachutes" for executives of forms from which assets are purchased.

The other elements are largely along the lines readers of these reports will expect.

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Leading negotiators from the House and Senate began a negotiating session at noon today with a goal to work as long as it takes to resolve the 15 issues remaining on the table. They are taking a break as we write this, with plans to return to their discussions this evening. Secretary Paulson is in the Capitol to assist the negotiators and ensure the Administration's views are being taken into account. Momentum continues to build towards the announcement of a deal by Sunday afternoon. Leaders of the House and Senate hope to have votes on Monday, but the complexities of drafting the legislation may require that votes be pushed off until after Rosh Hashanah which ends on Tuesday at sundown.

As this afternoon's negotiating session began Sens. Judd Gregg (R-NH) and Mitch McConnell (R-KY) both said the Senators and Representatives meeting today would stay in the room until a deal was reached. While that may be over-optimistic, it is indicative of the fact that these leaders are feeling pressure to get something accomplished.

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Between the bookends of last night's presidential debate and tomorrow's 4:15 p.m. kickoff of the Redskins-Cowboys game, official Washington is working hard to reach a compromise financial rescue plan. Staff members from both parties and both Houses of Congress met into the wee hours of the morning today on the legislation. Leaders hope to announce a plan on Sunday before the Asian markets open for their Monday sessions. Votes in the House and Senate are currently planned for Monday.

Staff members are meeting as this is written. The lead negotiators on the package are expected to meet this afternoon to review staff progress. As we noted in our final update yesterday, negotiators appear ready to graft onto the package a proposal from the House GOP to allow Treasury the option to develop an insurance program to support mortgage backed securities. Given Secretary Paulson's earlier comments that an insurance program would not be adequate to address the problems in the marketplace, it is unlikely he would use this option. However, including it in the plan provides a fig leaf to those who indicated they would try to block the plan that appeared headed for enactment before Thursday's White House meeting.

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The Dow Jones Industrial Average is ending the week with an increase of 138 points based on today's news that discussions over the financial rescue package are moving forward. Expectations for enactment of a package are such that key legislators are now pointing to the opening of the Asian markets on Monday, which takes place Sunday night East Coast Time, as the deadline for, at the very least, having a consensus rescue package ready for passage.

At this point, there are four key negotiators finalizing the terms of a legislative compromise: House Financial Services Chairman Barney Frank (D-MA), Senate Banking Committee Chairman Chris Dodd (D-CT), House Minority Whip Roy Blunt (R-MO), and Senate Budget Committee Ranking Member Judd Gregg (R-NH).

Senate Minority Leader Mitch McConnell (R-KY) held a news conference earlier this afternoon declaring that Gregg has full authority to represent Senate Republicans. Gregg, who appeared with McConnell, told reporters the markets are "telling us we better do something, and they're telling us in pretty stark terms." While Gregg agreed there are still "knotty and difficult issues" to negotiate, he said they are making progress.

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In a day of fast-moving developments there are some signs that discussions on a financial rescue package may re-start in a constructive way. According to Sen. Harry Reid (D-NV), House Republicans have agreed to return to the negotiating table at the noon hour under the leadership of House Minority Whip Roy Blunt (R-MO). To the extent the conversation is required to reach a compromise, this is a sign of progress in getting to a deal. Blunt will be bringing with him an outline of the House GOP plan to deal with the financial crisis. The key elements of that plan are the following:

• Federal insurance of mortgage-backed securities (in addition to the insurance already provided to Fannie Mae and Freddie Mac products). Premiums paid by asset owners would support the program.
• Regulatory and tax relief for the financial industry (e.g ability to suspend dividend payments).
• A cut in the capital gains tax.
• Greater transparency in reporting of the types of assets held by financial institutions and greater SEC scrutiny of audit reports.

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Momentum continues to build for enactment of the $700 billion Administration plan to buy troubled assets from financial institutions. As an indicator of the increasingly upbeat mood around the package, the Dow Jones Industrial Average increased by over 200 points for the day.

As we write this, President Bush is meeting with Sens. McCain and Obama and Congressional leaders to discuss how to advance the plan. While this meeting is viewed by many as a sideshow, a forceful statement by the sitting president and the two men seeking to replace him will add to the overall sense that action on Capitol Hill is soon possible.

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There has been a seismic shift in Congressional attitude over the past 48 hours. Skepticism over the administration’s plan has evolved into hardened resolve to achieve consensus and pass a financial relief package as soon as possible. People are still reluctant to commit to a timeframe, but the pace has quickened. Whereas two days ago, Senate staff were waiting for their House counterparts to draft a plan, reports now indicate that both sides began working together yesterday to craft a single, unified plan.

Publicly, several lawmakers, including Senate Banking Chairman Chris Dodd (D-CT) and House Financial Services Chairman Barney Frank (D-MA), have said Congress and the administration are very close to striking a deal in the next “day or so.” At 10 a.m. this morning Frank hosted Dodd as well as Sen. Bob Bennett (R-UT), a senior member of the Senate Banking Committee, and Rep. Spencer Bachus (R-AL), the ranking member of the House Financial Services Committee, to continue drafting the plan. We have reports that the drafting session will expand to include others and will continue all day. Congressional leaders are working to have a consensus plan by today’s 4 p.m. meeting at the White House with President Bush and the presidential candidates.

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Spending their every waking hour on Capitol Hill trying to convince lawmakers to accept the financial bailout plan may finally be paying off for Treasury Secretary Paulson and Fed Chairman Bernanke. Reports coming out of meetings held this morning and early afternoon have been decidedly more upbeat than anything we have heard thus far.

In addition to testifying at hearings and briefing large groups, Paulson held a private meeting earlier with House Speaker Nancy Pelosi (D-CA) and Minority Leader John Boehner (R-OH). While aides would not confirm whether the leaders and Paulson struck an agreement, there are signs the administration has made changes to the Paulson plan. In his House Banking Committee testimony this afternoon, close watchers noted that Paulson modified his remarks to allow for a compromise on limiting executive compensation as long as it does not "undermine the effectiveness of the program."

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Washington continues its bipolar approach to dealing with the Bush Administration's proposed plan to purchase, manage and sell troubled assets from financial institutions. Key leaders continue to work on the contours of a plan so that it can be voted on late this week. At the same time, rank and file Members, particularly on the GOP side, are turning up the volume on their objections. We continue to believe prospects are good for enactment of a plan to create a $700 billion investment to purchase assets. However it is clear that several pounds of flesh will be extracted from Secretary Paulson along the way.

Since yesterday, it has become more evident that executive compensation limits of some kind will be included in the final plan. The Administration still opposes this strongly, but they will have little choice but to accept it. Otherwise, there appears to be agreement on including outside oversight over Treasury on the program, protections against foreclosures on homeowners, and the option for Treasury to take warrants for stock from companies that sell assets to them.

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This morning’s Senate Banking Committee hearing was still continuing as the Bush Administration, House Banking Committee Chairman Barney Frank (D-MA), and House leadership were making plans for an urgent briefing today at 4 p.m. to convince House members to agree to the Treasury’s Troubled Asset Relief Program (TARP). Press reports about this morning’s House Democratic and Republican conference meetings characterized members’ reactions as “resistant.” Our sources on the Hill and off are saying the meetings were worse than reported, and the mood at both was antagonistic. As of now, the House does not have anywhere near the 218 votes needed to pass the Treasury plan, even with Chairman Frank’s endorsement.

Members of the Senate Banking Committee, including Sen. Chuck Schumer (D-NY), questioned whether the TARP could be funded in installments, precluding the need for Congress to authorize $700 billion in one lump sum. However, both Federal Reserve Chairman Bernanke and Paulson rejected the suggestion, saying that bolstering consumer confidence requires Treasury to have the full $700 billion authority, even if they do not utilize the entire amount. Both Paulson and Bernanke repeated on several occasions that lawmakers must not view the $700 billion as an expenditure, but as an investment that would be recovered – though perhaps not in full – over time.

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While congressional leaders and the Administration continue to make progress in developing a compromise $700 billion package to shore up the financial markets, this morning’s news is that skeptics in both parties are making their voices heard very strongly. This skepticism is not likely to derail the plan altogether, but it may slow its path to enactment.

Events in public and in private this morning have brought out the opponents of Secretary Paulson’s plan. A public hearing at the Senate Banking Committee began at 10 a.m. this morning and continues as this is written. At the hearing, Fed Chairman Ben Bernanke emphasized the importance of quick action on the plan. He said financial institutions continue to be at risk and the pending plan will be important to staving off further failures. Secretary Paulson pressed again for a “clean” piece of legislation (meaning with minimal add-ons) but also telegraphed some flexibility on issues like oversight and mortgage assistance for homeowners. Members of the committee from both sides of the aisle hit the Administration hard for pushing a plan that appears to be a “blank check” for the Treasury Secretary.

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Congress and the Administration have made significant progress today in refining the proposal released Saturday by Treasury Secretary Hank Paulson for a $700 billion purchase by the government of troubled financial assets. Prospects remain strong for Congress and the Administration to adopt a plan by the end of the week.

Between the release of the plan on Saturday and the opening of the markets today, Paulson made two important changes to his original plan. The first change was to broaden the class of assets eligible for purchase to include non-mortgage assets as deemed necessary. The second change was to allow foreign institutions with a significant US presence to participate in the asset purchase program.

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The Treasury Department this past weekend submitted legislation to the Congress requesting authority to purchase troubled assets from financial institutions in order to promote market stability, and help protect American families and the US economy. This program is intended to fundamentally and comprehensively address the root cause of our financial system's stresses by removing distressed assets from the financial system.

The following description reflects Treasury's proposal as of Saturday afternoon.

Scale and Timing of Asset Purchases. Treasury will have authority to issue up to $700 billion of Treasury securities to finance the purchase of troubled assets. The purchases are intended to be residential and commercial mortgage-related assets, which may include mortgage-backed securities and whole loans. The Secretary will have the discretion, in consultation with the Chairman of the Federal Reserve, to purchase other assets, as deemed necessary to effectively stabilize financial markets. The timing and scale of any purchases will be at the discretion of Treasury and its agents, subject to this total cap. The price of assets purchases will be established through market mechanisms where possible, such as reverse auctions. The dollar cap will be measured by the purchase price of the assets. The authority to purchase expires two years from date of enactment.

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