By Alison Vekshin and James Rowley
Sept. 26 (Bloomberg) -- Negotiations on the $700 billion rescue of the U.S. financial system stalled as House Republicans undercut the Bush administration and left it to congressional leaders to hammer out a compromise to calm markets.
A day that included an unprecedented meeting of the two presidential candidates joining the incumbent president, flanked by congressional leaders and Cabinet officers, ended short of agreement. Lawmakers were to meet again today in Washington after a group of House Republicans led by Eric Cantor of Virginia said they wouldn't back a plan based on Treasury Secretary Henry Paulson's approach.
``We are sitting down where we were at the end of day one,'' Senator Bob Corker, a Tennessee Republican, said as he headed into a late-night meeting with Paulson and lawmakers.
The setback unnerved investors, coming after the U.S. government closed Washington Mutual Inc., the largest U.S. savings-and-loan institution. Standard & Poor's 500 stock-index futures declined 1.4 percent in European trading and the yield on the two-year Treasury note fell 12 basis points to 2.04 percent, just above the Federal Reserve's target rate.
``I'm hopeful the worst of the crisis may be behind us if we can get Congress on board with the package,'' Stephen Roach, chairman and acting chief executive of Morgan Stanley Asia Ltd., said in an interview in Beijing. ``The government's role is to stop a crisis from turning into a catastrophe.''
U.S. stocks rose yesterday on the prospects for an agreement. The S&P 500 Index closed 1.97 percent higher.
Republican Alternative
Republican lawmakers offered a plan calling for Wall Street firms to purchase insurance on mortgage-backed securities and advocating tax cuts and relaxed regulations. Treasury officials had rejected a plan focusing on insurance in favor of one that purchased troubled assets, Cantor said.
After the late-night meeting on Capitol Hill, House Financial Services Committee Chairman Barney Frank and Senate Banking Committee Chairman Christopher Dodd said some progress in negotiations had been made. They said House Republicans needed to participate for a plan to pass Congress.
``The president and his party have got to decide whether or not they want to be a part of this,'' Dodd said.
The White House issued a statement saying Bush still ``supports the core of Secretary Paulson's plan.''
Working With Paulson
Frank said Democrats have been working with Paulson to address several issues, such as executive compensation, accountability, foreclosures, and some kind of warrants provision to provide taxpayers an equity stake in the companies that get rescued.
``On all of those, the secretary to his credit has now agreed in principle, and we are working how to do it,'' Frank told reporters after meeting Paulson last night. ``There will ultimately be $700 billion available, but how soon and with what other steps, are still being debated.''
Yet any agreement has to include House Republicans, Frank said. House Speaker Nancy Pelosi won't push through legislation backed by a Republican administration without their help, he said.
``Ms. Pelosi will not bring a partisan bill to the floor,'' Frank said. ``If the House Republicans continue to reject the president's approach, then there is no bill.''
Insurance Fund
The plan circulated by Cantor calls for a mortgage-backed security insurance fund, rather than taxpayer-funded purchases of those securities. The plan calls on the Treasury to design a system to charge premiums to mortgage-backed security holders to finance this insurance, according to a fact sheet.
Republicans also seek to ``remove regulatory and tax barriers that are currently blocking private capital formation.'' It also suggests that regulators call on financial institutions to suspend dividends, along with other steps to address liquidity problems.
Cantor said the House Republican proposal ``does not leave the American taxpayers with the bag and makes sure that Wall Street pays for this recovery.''
Representative Jeb Hensarling of Texas said it shouldn't be ``Paulson's plan or no plan.''
It's not just Republicans in the House who are attacking the administration-backed plan.
`Don't Believe'
``I don't believe this Paulson plan will solve the problems, it might exacerbate them,'' Richard Shelby, the top Republican on the Senate Banking Committee, said on MSNBC. ``Let's don't put a trillion dollars or more debt on our children and not even know if this will work.''
Republican presidential candidate John McCain and his Democratic counterpart Barack Obama met with Bush, Paulson and congressional leaders at the White House earlier yesterday. Democrats blamed McCain for initiating the meeting, which they said slowed down the pace of negotiations.
Dodd said on CNN that the Republican plan threatens to force negotiations to begin anew. He said the White House meeting ``looked like a rescue plan for John McCain for two hours, and it took us away from the work we were trying to do today.''
Obama suggested the talks were damaged by politics.
``When you start injecting presidential politics into delicate negotiations you can actually create more problems rather than less,'' Obama said on CNN.
McCain's campaign said more negotiations were needed to draft legislation that would pass Congress.
`Vote Yes for Anything'
``There is not yet a majority of Democrats and Republicans who are willing to vote yes for anything,'' said Steve Schmidt, a senior adviser to McCain's campaign.
Kevin Smith, a spokesman for House Republican Leader John Boehner, said the speed with which Dodd's plan was put together was designed ``to deny Senator McCain a role in trying to craft a bipartisan solution.''
Cantor was told by Boehner to start working on an alternative two days ago, Smith said. Pelosi was told yesterday.
Michele Davis, a spokeswoman for Paulson, said, ``Secretary Paulson appreciates the hard work by members on both sides of the aisle to address the threat we face to our economy,'' and urged lawmakers to resolve their differences.
Paulson has not rejected any ideas, Davis said.
To contact the reporters on this story: Alison Vekshin in Washington at avekshin@bloomberg.net; James Rowley in Washington at jrowley@bloomberg.net
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