In our ongoing effort to provide our clients and friends of the firm with updated information and insight on developments related to legislation to support the financial markets, the Foley & Lardner LLP Financial Crisis Response Team is pleased to provide the following summary of today's events in Washington.
The political situation surrounding the negotiations to devise a financial rescue is rapidly changing. The agreement Treasury Secretary Paulson and the House and Senate negotiators struck appears on very shaky ground. This afternoon’s meeting at the White House with presidential nominees McCain and Obama and the Congressional leadership is being described by participants as contentions. Senator Richard Shelby (R. AL), the ranking Republican on the Banking Committee, walked out of this meeting before it ended. Additionally, House Minority Leader Boehner (R. OH) presented the core of a House Republican alternative that reflects the position of rank and file House Republicans in opposition to the framework worked out by Congressional negotiators and the Administration. As of 6:00 PM EDT the effort to develop a bailout plan is in total disarray.
Lawmakers worked through the night and in a three-hour meeting this morning to reach agreement on a compromise bill that would bailout financial institutions up to $700 billion. It has been reported that Congress is poised to appropriate the money in several segments rather than approving the entire amount at one time. This gives Congress the benefit of voting in favor of a measure that could help stave off a deep recession while acknowledging constituents' concerns about the enormous price tag on the President's initial proposal. Despite the fact that Democratic and Republican Congressional leaders agreed to a compromise - and that the bill is likely to pass by a reasonably comfortable margin in both chambers - many lawmakers remain frustrated about the haste with which this legislation has been presented to them.
A draft of the legislation was not ready by the time Congressional leaders and the two major parties' presidential candidates were to meet with President Bush at the White House this afternoon. However, House Financial Services Committee Chairman Barney Frank (D-MA), the Committee's ranking member, Spencer Bachus (R-AL), and Senate Banking Committee Chair Chris Dodd (D-CT) all appeared at a post meeting press conference and announced they reached agreement to broad principles that will be reflected in the legislation. At that time, they said the bill will include a provision to limit executive compensation for firms that avail themselves of government funds. It is likely that the bill will provide for government equity in firms it helps rescue, such that taxpayers stand to gain if the companies are profitable. And, unlike the President's original plan floated over the weekend, the compromise bill would include vigorous oversight of the Treasury Department's implementation of the bailout plan. We will update the side-by-side comparison of the original House and Senate bills, which was sent in our September 23 update, when the compromise bill becomes available.
Early reports said that the $700 billion would be broken up into three roughly equal parts. Sen. Charles Schumer (D-NY) said in a 3:30 pm (Eastern) TV interview that the bill will break the funding into three unequal parts, which would be phased in over the next eight months with $250 billion up front, $100 billion after certification by the President that additional funding is still needed, and another $350 billion by May 2009. He also stated that the legislation would create two oversight boards, one comprised of bipartisan Members of Congress to oversee the plan, and one of outside advisors to monitor and alter actions of the Treasury Secretary.
There is still vocal opposition from key Republicans about the bill. Sen. Richard Shelby (R-AL), the ranking GOP member of the Senate Banking Committee, was noticeably absent from the post-meeting bipartisan press conference and later said that while progress had been made on the bill, there was no final agreement. According to a news report, Sen. Shelby's spokesperson said that he didn't participate in the morning's three hour session because he doesn't support the "thrust" of the plan being pushed by Treasury Secretary Henry Paulson. Shelby offered his own plan this afternoon, which "calls for an enhancement of the government's existing lending facilities and guarantee programs. According to Shelby, this would help stabilize money market funds and provide loans to troubled financial institutions without exposing taxpayers to massive losses." Both Sen. Shelby and Sen. Judd Gregg (R-NH), the Senate Budget Committee Ranking Member, appeared in separate television interviews and noted that while progress had been made on the bill, in their estimation, there was still a long way to go.
Sen. Bob Bennett (R-UT) appeared in place of Senator Shelby at the press conference and is acting as the top Senate GOP negotiator. He said that he could support the idea of giving taxpayers equity in bailed-out firms, and he believed that these obligations would not dissuade troubled banks from participating.
An alternative proposal was circulated at today's meeting of the House Republicans in which the government would provide insurance to companies that agree to hold frozen assets, rather than purchase them directly as envisioned under the Administration's plan. The participating firms would have to pay insurance premiums to the Treasury Department for the coverage. "The taxpayers haven't done anything wrong," said Rep Eric Cantor (R-VA), a key conservative member, adding that rather than require them to bear the cost of the bailout, the alternative "pretty much puts the burden on Wall Street over time."