The Bailout: Public Anger, Private Talks

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.

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