Businessweek - Top News September 24, 2008, 12:01AM EST

Congress has one eye on angry voters, but behind the scenes a compromise appears to be in the works to rescue Wall Street

(L-R) U.S. Treasury Secretary Henry Paulson, Federal Reserve Board Chairman Ben Bernanke, Chairman of the Securities and Exchange Commission Christopher Cox, and director of the Federal Housing Finance Agency James Lockhart III Chip Somodevilla/Getty Images

by Theo Francis and Jane Sasseen

With public sentiment casting the Bush Administration’s plan to resolve the financial crisis as a bailout for the firms that caused it, Senate Banking Committee members took turns grilling Treasury Secretary Henry Paulson and Federal Reserve Board Chairman Ben Bernanke at a hearing on Sept. 23. Behind the scenes, however, many expected nuts-and-bolts negotiation to yield a compromise bill, perhaps over the weekend if not by Friday’s scheduled adjournment. Agreement was already coalescing to require some restrictions on executive pay at companies that sell toxic assets to the Treasury, one financial industry official said.

The theater playing out on Capitol Hill on Tuesday reflected deeply held positions on the role of government and the economy, but with an eye toward how events would play out politically. Polls failed to give a clear picture of just how much support there is for Congress to act: Support ranged from 25% to 56% in different polls.

Lawmakers worry that failing to back the bailout could hurt them, particularly in light of the Administration’s warnings of the dire consequences of inaction and the reality of a tumbling stock market (BusinessWeek.com, 9/23/08). At the same time, fears grew that a protracted debate could undermine support altogether as more questions are raised about the plan’s costs and effectiveness.

Some Homeowner Help

Political analysts predicted both sides would give way at least partially on various fronts. Indeed, the Administration has already indicated it would accept at least some provisions aiding homeowners struggling to pay their mortgages, and the Senate omitted from draft legislation a proposal, popular among many Democrats, to allow judges to modify mortgages in bankruptcy court. Congressional aides conceded the measure faced too much opposition from the financial-services industry, which has focused its most intense lobbying efforts on killing the provision.

Senator Christopher Dodd (D-Conn.), chairman of the Senate Banking Committee, said he would work with Representative Barney Frank (D-Mass.), chairman of the House Financial Services Committee, to combine draft legislation each chamber had circulated.

Many of the Democrats’ demands could ultimately prove to be part of a strategy to “ask for five in the hopes of getting three,” says Daniel Clifton, a political analyst for investment adviser Strategas Research. And the political calculus has many twists: Democrats, for example, could suffer if they are seen as impeding a much needed rescue, or might set themselves up for a public-relations victory if the Administration succeeds in blocking executive-pay restrictions (BusinessWeek.com, 9/22/08) or measures to help homeowners that prove popular. It’s win-win either way: Six weeks before the election, they can tell the folks back home they won such concessions from the Administration, or they can campaign on the fact that Republicans blocked them.

Dire Warnings from the Administration

During Tuesday’s steady-rolling, five-hour hearing, the main battle lines were clear: Bernanke, Paulson, and other Administration officials urged quick passage of a stripped-down bill to let the Treasury use up to $700 billion to buy complex mortgage-related securities from financial institutions. That would push many decisions—about oversight, disclosure, the prices the government would pay to take toxic assets off corporate balance sheets—into the future, leaving most such calls up to the Treasury, in this Presidential Administration and the next.

Bush Administration officials warned of dire consequences should Congress delay or impose too many limits on Treasury’s authority. Paulson said he believed the stock market’s recovery late last week stemmed from the belief that Congress would act. “I feel great urgency, and I believe it’s got to be done this week or before you leave,” Paulson said. Stocks opened ahead early Tuesday, but sank as the hearing progressed. The Standard & Poor’s 500-stock index closed down 18.87, or 1.56%, to 1,188.22. The Dow Jones industrial average was off 161.52, or 1.47%, to 10,854.17. Including Monday’s 370-point drop, the Dow was down 534 points, or 4.69%, so far for the week.

The response from lawmakers to the bailout plan was generally chilly. Most indicated that they agreed some action was necessary soon. But many took the Bush Administration to task for initially proposing to give itself nearly complete discretion, with no oversight and no judicial review. Administration officials have since indicated that they would accept some measure of oversight, though details remain unclear. Congressional proposals include an inspector-general’s office, regular audits, and weekly public disclosures, among other measures.

Taking Wall Street to Task

Senators of both parties demanded more oversight and transparency, questioned the Administration’s decision not to give taxpayers a stake in companies benefiting from the Treasury program, and above all insisted that the final measure should clearly and in many cases directly assist homeowners struggling to pay their mortgages. Many Democrats called for restrictions on executive compensation, and several held out hope that the final measure would allow judges to modify the terms of mortgages in bankruptcy court, much as other loans can be modified.

Throughout, the senators took Wall Street and the financial sector vigorously to task. Some Senators expressed skepticism that the multibillion-dollar bailout would resolve the economic threat. “Wall Street bet that the government would rescue them if they got into trouble; it appears that bet may be the one that pays off,” said Senator Richard Shelby (R-Ala.). “I do not believe, however, that we can solve this crisis by spending a massive amount of money on bad securities.”

Congressional staff and political analysts say that, while many lawmakers have been impressed by Bernanke and Paulson with the need to move swiftly, they also have constituents to satisfy. And those constituents appear to be taking a dim view of the Treasury’s proposal. Some of those insiders predicted that a compromise would likely be reached by week’s end, and said much of the bickering over specific provisions would fall by the wayside—with each side getting a few key concessions—as a kind of posturing aimed at placating constituents. “The phones are burning up with angry constituents,” says Howard Glaser, a former Clinton housing official and mortgage-industry consultant. “Congress is looking for something to say, ‘Here’s help for households.’”

Calls for Due Diligence

Indeed, calls for “foreclosure assistance” peppered the hearing. Senator Christopher Dodd (D-Conn.), the committee’s chairman, complained at the outset that Treasury’s proposal “would do nothing, in my opinion, to save a single home, at least up front.”

Lawmakers have been reluctant to embrace Paulson and Bernanke’s argument that helping the financial markets will help Wall Street to prevent foreclosures. “The very best thing we can do is make sure the capital markets are open and that lenders are continuing to lend,” Paulson said. Instead, draft legislation circulated for discussion in both the House and Senate this week have included provisions designed to help homeowners stave off foreclosure directly. The Administration has given signs that it is willing to accept some measure of assistance to homeowners.

In the hearing, lawmakers also took issue with the Administration’s request for access to $700 billion, and by the hearing’s end, several seemed to be mulling the possibility of handing over only a portion of the $700 billion the Administration has requested and doling out more as results warrant. “None of the thousands of money managers would invest that sum without the appropriate due diligence,” said Senator Charles Schumer (D-N.Y.) “This hearing today and the discussions that will follow are our due diligence.”

Profit Not Likely

Paulson stressed that the loans and mortgage-related securities Treasury acquired would eventually be sold to recoup some of the outlay, and acknowledged that the agency wasn’t likely to use the full amount quickly. But he said the Treasury needed access to the full amount from the beginning. “The best way to protect the taxpayer…is to do something that has the maximum chance of working,” he said. “We need market confidence and we need the tools to work with.”

A few lawmakers suggested that the rescue program, run judiciously, might break even or turn a small profit. Paulson and Bernanke made clear that they didn’t consider it likely.

Paulson and Bernanke took perhaps greatest issue with suggestions that the government should receive stakes in companies that seek federal aid, and that the companies should also accept limits on executive compensation. Paulson noted that the government has acquired stakes in companies it has saved from insolvency, including a 79.9% stake in insurer American International Group (AIG). But he stressed that the plan for systematically buying up troubled securities depends on a broad spectrum of companies participating. Layering conditions on the program would dissuade them. “If we have to have companies grant equity stakes, grant options, that would render this ineffective,” Paulson said. Compensation reforms, meantime, can wait for more deliberate regulation in the near future, he said.

Francis is a writer in BusinessWeek’s Washington bureau. Sasseen is Washington bureau chief for BusinessWeek.

source: Businessweek

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