SEPTEMBER 29, 2008

Crisis Hits Europe's Banks
As U.S. Seals Bailout Deal

By DEBORAH SOLOMON, DAMIAN PALETTA and GREG HITT

WASHINGTON -- The Bush administration and congressional leaders agreed on a deal to authorize the biggest banking rescue in U.S. history.

The $700 billion program would effectively nationalize an array of mortgages and securities backed by them -- instruments whose deteriorating value has clogged the nation's financial system.

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House Speaker Nancy Pelosi (right) speaks during a news conference on Sunday evening with Rep. Barney Frank (left) and Senate Majority Leader Harry Reid.

Lawmakers finished writing the bill late Sunday, after which Speaker of the House Nancy Pelosi declared it "frozen," meaning no changes would be made. The bill leaves many mechanics of the operation up to the Treasury. Among these are the crucial issues of how the U.S. government would decide which assets it will buy and how it would decide what to pay for them. The legislation leaves the Treasury 45 days to issue guidelines on those procedures. The bill awaits votes in Congress starting on Monday.

From big Wall Street houses to small community banks, executives have expressed an interest in signing up for the bailout. But some have said the extent of their involvement will depend on critical details, including whether they would have to take further write-downs.

The political fallout from the bailout could be substantial, given the enormous expenditure of taxpayer money. Some polls show wide opposition. But the legislation includes provisions designed to guard against ultimate losses for the government.

At its core is Treasury Secretary Henry Paulson's concept of buying impaired mortgage-related assets from financial firms -- giving them cash to replace the toxic debts that have put them in danger or dissuaded them from lending. The plan is to help the firms restore their capital bases as well as the trust that enables them to borrow and lend at reasonable terms. Without this, officials worry that the credit markets, the lifeblood of the economy, would grind to a halt.

Sellers of assets could include a broad range of financial entities -- not just banks but also credit unions and pension funds. The assets offered to the government must have been originated or issued on or before March 14, 2008.

The Treasury Department wouldn't get the entire $700 billion for purchasing such assets up front. Just $350 billion would be immediately available. But the other $350 billion would be available unless Congress specifically holds it back.

Senate Majority Leader Harry Reid, House Speaker Nancy Pelosi and Treasury Secretary Henry Paulson announce a tentative deal on a Wall Street bail out. Video courtesy of Fox News. (Sept. 28)

The plan would impose some restrictions on executive compensation at firms that sell assets to the government. These include a ban, for firms that sell a large amount of securities to the U.S., on creating new "golden parachute" payments to departing top executives. The legislation also includes a so-called clawback provision permitting the U.S. to recoup executive bonuses based on misleading corporate financial statements.

The Treasury would receive nonvoting common stock or preferred stock in financial institutions benefiting from the bailout program. The program would be subject to oversight that includes a bipartisan congressional committee and the Government Accountability Office. The GAO would have an office located within the Treasury Department.

The Treasury plans to hire asset managers to determine the criteria for the purchase of securities and oversee the portfolio once the buying begins. While those details remain murky, the Treasury expects to buy up large chunks of assets at a single time. The asset managers would likely start buying the simplest assets first, such as mortgage-backed securities, and then move on to more complex one, such as collateralized debt obligations.

One likely method of purchasing and pricing assets is a reverse auction. In this, firms would offer to sell securities at given prices, and the Treasury could purchase the least expensive on offer. Institutions would presumably offer to sell at prices high enough to alleviate their woes but not so high they'd be passed over by Treasury in favor of lower-priced offers from others.

The historic legislation is an attempt to stem a crisis that threatens to stall the U.S. economy. Treasury Department officials dubbed it their "break the glass" plan. Under the glare of public scrutiny and the threat posed by deteriorating credit markets, lawmakers held a marathon weekend negotiating session, speaking with, among others, President George W. Bush, the two presidential nominees and investor Warren Buffett.

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Sen. Judd Gregg, left, and Sen. Christopher Dodd talk with reporters on Capitol Hill Sunday.

The agreement came together only after concessions on all sides. Democrats backed down from a controversial proposal to let bankruptcy judges alter the terms of mortgages, and from another that would have steered any ultimate government profits from the package to affordable-housing programs.

The Bush administration, for its part, agreed to much broader executive-compensation limits than it originally envisioned, among other things.

During a meeting last Thursday, Rep. Barney Frank, chairman of the House Financial Services Committee, was asked how the Treasury felt about limits to executive compensation, according to two people familiar with the matter. "I feel like I'm telling the chief rabbi of Jerusalem to eat bacon on Yom Kippur," the Massachusetts Democrat replied. "In other words," added Sen. Charles Schumer of New York, "it's against their religion."

At a pivotal point Saturday afternoon, Secretary Paulson met with lawmakers and argued over whether the funds would come in one tranche or in installments. "Damn it, if you think you need $700 billion right away you better tell us," Sen. Schumer told Mr. Paulson, according to two people familiar with the matter.

"I'm doing this for you as much as for me," Mr. Paulson shot back. "If we don't do this, it's coming down on all our heads."

The House plans to vote on the measure Monday, with the Senate likely to follow later in the week. Both parties have already started the process of pressuring and cajoling members to vote for the bill. Passage is seen as likely, despite the measure's unpopularity. Support from House Republicans, who staged an 11th-hour revolt on Thursday, will be vital, as will the backing of the Democratic leadership.

"I'm not happy with the whole situation, but we have something we can support," said House Speaker Pelosi, a California Democrat.

An exhausted Sen. Chris Dodd, a central player in the negotiations, expressed Congress's split emotions Sunday morning. "I'm pleased that we've come to a result," the Connecticut Democrat said. "I think it's dreadful that we had to come to this result."

Associated Press

House Speaker Nancy Pelosi, Treasury Secretary Henry Paulson, right, Senate Majority Leader Harry Reid, second left, and Sen. Judd Gregg, left, announce a tentative deal on legislation regarding the financial crisis just after midnight Sunday.

Several days ago, it wasn't clear any kind of deal would be reachable, amid divisions between Democrats and Republicans in Congress and between Democratic negotiators and the Bush administration. The tensions of election-year politics ratcheted the pressure further.

On Thursday, talks broke down after a showdown at the White House featuring congressional leaders and the presidential candidates. House Republicans, emboldened by the emergence of Sen. John McCain on the scene, demanded wholesale revisions, including an insurance-type plan through which banks would pay into a fund to protect against further declines in asset values.

Fearing the defection of House Republicans, Mr. Paulson agreed to consider the insurance option being pushed by Republican Rep. Eric Cantor. Mr. Paulson didn't believe such a plan would work as effectively as buying assets outright but said he was open to considering it. Inside the Treasury there was deep concern that divisions between the White House and House Republicans could blow up the deal.

Mr. Paulson's negotiators arrived Friday on the Hill with a basic message: We can compromise on certain things, but we can't agree to anything that will limit participation in the program. Treasury staff members and congressional staffers separated the legislation into piles, one for bipartisan agreement and another pile for contentious items. It was clear a lot of issues remained unresolved.

Sen. Lindsey Graham, who arrived in Washington at 4 a.m. Saturday after Friday's presidential debate in Mississippi, sipped a Diet Mountain Dew as he walked through the Capitol six hours later. He said any agreement would have to include some version of the insurance program pushed by House Republicans.

At 3:15 p.m. Saturday, a group of lawmakers met in a conference room just outside the office of Rep. Pelosi. Republican aides complained as they saw eight Democratic lawmakers arrive for the meeting, but only two Republicans.

Mr. Paulson, who looked exhausted, reiterated his warnings about the consequences of a failure to act. "The crisis is ongoing," he said. "You saw what happened earlier this week with Washington Mutual" -- which on Thursday became the largest banking institution to fail in U.S. history. "There are other companies," Mr. Paulson said, "including large companies, which are under stress as well. I can't emphasize enough the importance of this."

The meeting grew contentious. Senate Democrats, many of whom had felt let down by the Bush administration when the plan nearly derailed at the White House, were more assertive. For almost three hours the group argued, with several members yelling at Mr. Paulson. The Treasury secretary, growing agitated at times, continually told members they needed to design a program that would work and that it made no sense to create a program if financial firms didn't want to participate in it. "The situation is fragile," he said repeatedly.

Democratic Sen. Max Baucus of Montana, chairman of the Finance Committee, became frustrated that Mr. Paulson appeared to be arguing for softer language on the executive-pay rules, arguing that executives at these companies shouldn't be handsomely paid. "Let's not get emotional," Mr. Paulson responded, according to someone in the room.

Mr. Paulson also objected to language that would give a new oversight board power to control how the new program would be run. "All we're talking about is having Groucho, Harpo, and Chico watching over Zeppo," said Rep. Frank, before Democrats backed off.

Associated Press

Sen. Charles Schumer, left, Sen. Max Baucus and Sen. Jack Reed take a short break during ongoing negotiations on Capitol Hill Saturday.

The meeting ended around 5:30 p.m., and lawmakers broke into smaller working groups. Sandwiches and pizza were delivered later in the evening. Many lawmakers continued grazing on a big bowl of pistachios in Rep. Pelosi's office.

The House speaker's office was furious about leaks coming out of Saturday's afternoon meeting. In order for Capitol Hill aides to stay in the meeting, they had to hand over their BlackBerrys, said one participant. A Pelosi staffer walked through the meeting with a trashcan. The email devices were later put on a table with Post-it notes noting their owner.

On the tough issue of limiting severance pay for executives, Sen. Schumer wanted a one-size-fits-all approach. Mr. Paulson argued that this would make the program impossible to implement quickly, by requiring every company to redo its employment contracts.

They agreed to a compromise under which any firm that sells more than $300 million of assets to Treasury wouldn't be able to create any new golden-parachute provisions for executives for the duration of the program. Existing severance plans wouldn't be affected.

The final hangup was a move to make sure taxpayers were reimbursed if the plan lost money. Democrats earlier wanted a fee or tax be levied on financial firms to cover losses.

By 11:30 p.m., there was a breakthrough, pushed by Rep. Pelosi. The administration would be required to submit a plan to Congress "to recoup those losses from the entities that benefited from this program," according to a summary circulated among House Republicans.

Lawmakers and the administration also struggled with details of the Republicans' insurance plan, which ultimately survived in limited form as an option for the Treasury.

Sen. Barack Obama, the Democratic candidate for president, spoke to Secretary Paulson four times on Saturday and to Senate Majority Leader Harry Reid twice. Sen. John McCain placed a series of phone calls to major Republican players. Sensitive to allegations that his involvement had moved the process backwards earlier in the week, Sen. McCain wanted to show he was encouraging a deal. "Get it done," Republican Sen. Judd Gregg of New Hampshire recalls Sen. McCain saying in one call.

An official familiar with the conversations said Sen. McCain also tried to encourage reluctant House Republicans. "He would say, 'You are absolutely right -- the first round was a bad deal,'" and then go on to explain the urgency of acting on something else," this person said.

Early Sunday, Mr. Paulson, Rep. Pelosi, Sen. Reid and other lawmakers, emerged to say an agreement was in hand. "I think we're there," Mr. Paulson said.

Write to Deborah Solomon at [e-mail], Damian Paletta at [e-mail] and Greg Hitt at [e-mail]