Lawmakers Say They Have Breakthrough on Rescue Plan

By James Rowley and Alison Vekshin

Sept. 28 (Bloomberg) -- U.S. lawmakers said they made a breakthrough in talks on a $700 billion plan to revive the credit markets and expect to announce an agreement on legislation later today.

Negotiators resolved ``our differences so we can go forward with a package to stabilize the market,'' House Speaker Nancy Pelosi told reporters when talks at the Capitol ended after midnight Washington time. Lawmakers will review a written version of the plan later today, she said. The House may vote tomorrow.

The plan would let the Treasury begin purchasing distressed debt securities from financial companies affected by the record number of home foreclosures.

After five years, if there was a net loss to taxpayers, the president would have to submit a plan to Congress to recoup the funds, according to an outline circulated by congressional aides.


The proposal also includes accountability provisions, limits on executive pay for participating companies, and foreclosure relief, said Senate Banking Committee Chairman Christopher Dodd, a lead negotiator.

Senate Majority Leader Harry Reid, a Nevada Democrat, sought an agreement to reassure investors before Asian financial markets open late today.

Effective in Marketplace

Treasury Secretary Henry Paulson said the proposed deal ``will work and be effective'' in the marketplace. More work needs to be done, ``but I think we're there,'' he said.

Paulson and Federal Reserve Chairman Ben S. Bernanke said the rescue plan was necessary to revive lending and restore the flow of credit to the U.S. economy. President George W. Bush warned yesterday that legislative action was needed to avoid a ``deep and painful recession.''

Bush spokesman Tony Fratto said early this morning that administration officials are ``pleased with the progress tonight and appreciate the bipartisan effort to stabilize our financial markets and protect our economy.'' He said Bush had spoken last night with Pelosi on the negotiations.

Lawmakers had resisted giving Paulson unrestricted power to buy the debt and sought controls to assuage angry constituents who bombarded congressional offices with e-mails and phone calls.

`Don't Want' Bailout

Voters ``don't want a bailout of Wall Street and neither do we,'' Democratic Senator John Kerry of Massachusetts told reporters yesterday. ``What we are talking about is not losing 3 million jobs in a matter of weeks'' and helping ``small banks and small businesses literally keeping their doors open.''

Senator Kent Conrad, a North Dakota Democrat who chairs the Budget Committee, said $250 billion would be immediately available and another $100 billion could be used when requested by the president for debt purchases. Congress could bar the expenditure of the remaining $350 billion only by passing a resolution to block it from being spent.

The package includes a provision aimed at ``preventing golden parachutes'' for executives of companies who leave firms that have sold troubled assets to the government, Conrad said.

Stock Warrants

Companies that sell debt to the government will issue stock warrants to the government so that taxpayers ``can gain as companies recover'' from economic difficulties, Conrad said.

The plan also includes a proposal by House Republicans, whose objections scuttled an earlier agreement in principle, that provides for government insurance of mortgage-backed securities. Paulson has opposed the idea and has testified it wouldn't work.

The measure leaves it up to Treasury how to ``structure the program and they will assure that the premiums will be set at a level that fully protects the taxpayers of the country,'' Conrad said.

``We worked out everything,'' said Senator Judd Gregg, a New Hampshire Republican. He said lawmakers still want to see the text of the accord on paper before announcing a final deal.

``If there are no adjustments'' to that ``we'll be all set,'' he said.

Missouri Representative Roy Blunt, the lead negotiator for House Republicans, voiced satisfaction for his colleagues who were ``very concerned that we would be able to bring both free- market principles and taxpayer protections to the table.''

House Republicans ``will be looking at the final wording of this,'' he said. Still, ``I think we will be able to have an announcement'' later today, Blunt said.

At one point during the negotiations billionaire Warren Buffett spoke by telephone to a lawmaker involved in the talks to offer ``his best thinking about market reaction to various things,'' Conrad said. ``People are trying to reach out to the best minds that they know.''

`Foreclosure Mitigation'

A proposal that would allow judges to modify mortgage terms for struggling borrowers in bankruptcy proceedings wasn't included, said Dodd, a Connecticut Democrat. ``We pushed very hard'' for the bankruptcy provision, ``but we feel we got good foreclosure mitigation language in there,'' Dodd said.

Democratic presidential nominee Barack Obama said the plan ``appears to embrace'' his principles that the legislation include oversight by an independent board; protections for taxpayers to ensure they receive any profits; measures to help homeowners stay in their homes; and rules to make sure ``CEOs are not being rewarded at taxpayers' expense.''

Reid said an announcement would come later today after details are worked out.

Series of Breakthroughs

``There were a series of breakthroughs here in the end'' and the agreement on executive compensation ``was certainly the most important,'' Conrad said. He declined to give further details because the language being drafted by lawyers is ``quite complicated.''

``Get it written and get it voted,'' said Gregg. ``That's the game plan.''

Paulson and Bernanke sought the rescue package after the collapse and bankruptcy of Lehman Brothers Holding Inc. and the Federal Reserve's takeover of American International Group Inc. earlier this month.

Sticking Point

The House Republicans' demand to include insurance for mortgage-backed securities was a major sticking point.

``Nationalizing every bad mortgage in America is a profoundly bad idea,'' Indiana Republican Mike Pence said. He described the plan as ``transferring $700 billion from Main Street to Wall Street.''

Premiums on the insurance would be a way ``for those on Wall Street to help pay for the recovery'' so that the financial industry won't ``just turn to taxpayers'' for the rescue, said Virginia Republican Eric Cantor, a member of his party's leadership in the House.

Democrats blamed Republican presidential candidate John McCain for encouraging the House Republicans' rebellion by traveling to Washington last week to meet with them.

The trip also included a White House meeting on Sept. 25 with Bush and congressional leaders, where a bipartisan consensus on the outlines of a deal broke down.

McCain ``only hurt this process,'' Reid complained to reporters.

McCain's close ally, South Carolina Republican Lindsey Graham, said the Arizona senator was ``enormously helpful'' to the talks when he met with House Republicans who were about to be ``rolled'' by the Senate.

McCain told them ``I hear your message'' so ``let's make the bill better, but let's not go too far,'' Graham told reporters.

To contact the reporters on this story: James Rowley in Washington at jarowley@bloomberg.netAlison Vekshin in Washington at avekshin@bloomberg.net