Financial Reform Watch : Financial Services News & Information : Blank Rome Government Relations Lobbying Firm : Government Relations, Corporate Governance : Financial Reform Watch Law Blog

 Congress was in recess last week for the President’s Day holiday, but Senate Banking Committee staff remained focused on financial reform. Despite the fact that committee Chairman Chris Dodd (D-CT) was spending his break on a congressional trip to Central America – by happenstance with his new negotiating partner Sen. Bob Corker (R-TN) – the committee staff announced that the Chairman would release his “new wide-ranging bill" this week. As of today, that deadline has already slipped to the first week of March, meaning that the committee will not markup the legislation until the second or third week of March at the earliest.

We are hearing reports that the new draft will establish a council of regulators, led by the Treasury Secretary, responsible for monitoring systemic risk across the entire financial system. There have also been reports the draft will include provisions for a new bankruptcy-like system to wind down institutions previously considered “too big to fail.” The FDIC is expected to have a key role in that process.

Separately last week, Sen. Richard Shelby (R-AL), the committee’s Ranking Republican, announced that he was working on a Republican alternative to the Chairman’s financial reform draft. Shelby has made no public statements about Corker’s decision to work with Dodd, but the fact that Shelby is producing his own bill speaks volumes.

There is a lot of prognosticating right now. Corker’s positions are far more in line with Shelby’s than Dodd’s. The question is will Corker be able to convince Dodd to pass a streamlined bill that deals with a few key issues and tables the thorny issue of the Consumer Financial Protection Agency? Many industry experts are saying that Dodd and Shelby would have already worked out that deal if it was possible, and the Republican caucus is likely of the same mind, which puts Corker in a tough position. The outlook for financial reform continues to be very uncertain.

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Senate Banking Committee Chairman Chris Dodd (D-CT) and Ranking Member Richard Shelby (R-AL) continue to work towards bipartisan agreement on at least some key elements of a financial reform measure. While the process has been a rocky one, both Senators appear to be working hard to find common ground. They appear to have found agreement on at least two things:

1. There will NOT be a stand-alone Consumer Financial Protection Agency.  Rather, consumer protections functions will be folded into another agency or agencies.

2. The president's proposal to limit the size of financial institutions (the "Volcker rule") has complicated the process and may have come too late in the game.

Our contacts on the Hill are telling us to expect committee action on a financial reform package by the end of the month. Regardless of the final outcome of the Dodd-Shelby discussions, the Chairman appears committed to moving ahead.

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That is the recent refrain of Senate Banking Committee Republicans when asked about the financial services regulatory reform bill now pending in the Senate.

While Republicans have expressed continued willingness to work with committee Democrats to develop bipartisan legislation that would address the root causes of the recent financial crisis, they appear in no hurry to pass a bill—and certainly not what they consider a “bad bill”—just for the sake of having a bill.

As a whole, Senate Banking Committee Republicans think the Dodd bill and the House-passed reform bill go too far. Chairman Chris Dodd (D-CT) seems well aware of that fact and, as reported previously, has constituted numerous working groups to hammer out the various issues. Those groups are currently working together to resolve outstanding issues, with varying degrees of progress.

While the committee has been expected to mark-up its version of the financial reform bill in February, that schedule will depend upon the level of progress and bipartisanship the committee is able to achieve. One major stumbling block has been the establishment of a new Consumer Financial Protection Agency (CFPA)—a signature issue of the Obama Administration. Chairman Dodd has reportedly expressed a willingness to move away from the CFPA in a favor of giving more consumer protection authority to existing prudential regulators—a position also favored by committee Republicans.

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Sen. Banking Committee Chairman Chris Dodd's (D-CT) announcement that he will not seek re-election has roiled the already choppy waters surrounding the financial reform legislation. The Financial Reform Watch team has been intrigued by the comments attibuted to congressional and industry sources indicating that his retirement may increase the opportunity for a bipartisan bill. We are not so sure.

While we would all like to think that respect for a departing colleague and the desire of Senators to help him cement his legacy would result in more cooperation, there is little evidence to suggest today's Senate operates on that principle. We need only look back as far as the consideration of health care reform to support our view. Early in 2009, many thought the illness of Sen. Ted Kennedy would spur Senators to help him achieve his goal of more than 30 years to achieve health care reform. After his death, there was even more talk of how Senators might be moved to seek accommodation in his memory. Clearly, those sentiments—if they ever existed—were overwhelmed by the deep partisan divide in the Senate.

Today, those who indicate that bipartisanship might emerge in the wake of Dodd's announcement seem to believe he will be more accommodating of GOP concerns over certain issues—particularly the creation of the Consumer Financial Protection Agency. Our contacts on the Hill suggest that creation of that agency is as close to non-negotiable for the Administration and Sen. Dodd, not to mention House leaders, as any issue in the package. If the price of GOP support for the bill is dropping that, we are doubtful we will see much bipartisanship.

So our assessment is that is is too early to say whether Dodd's retirement improves or diminishes chances for a bill to be enacted. Your FRW team will be monitoring the situation closely and will keep you apprised of developments.

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• Full Text of Bill (PDF)
• Summary of Bill (PDF)

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On home improvement shows, it’s called the big “reveal.”  In Washington, the “reveal” is expected on Monday in the Senate Banking Committee with the much anticipated release of Chairman Chris Dodd’s (D-CT) omnibus financial reform bill. Rumors of its content have been leaking out for several days. Also being revealed --although it has been hinted at for weeks-- is the partisan divide that has opened up on Chairman Dodd's committee.

One of the most controversial elements expected to be in Dodd’s plan is the removal of bank supervisor authorities from the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of Comptroller of the Currency, and the Office of Thrift Supervision in order to consolidate those authorities into one new super bank regulator. Neither the administration proposal nor House Financial Services Committee measures contemplated this approach. In fact, Financial Services Committee Chairman Barney Frank (D-MA) has criticized the concept because it does not “respect and preserve the dual banking system;” it undercuts the role of state bank supervisors; and it fails to preserve the role of the FDIC, an agency that Frank thinks is performing well.

Other expected provisions are a “Council of Regulators” approach to systemic risk; a Consumer Financial Protection Agency that will have oversight over most financial service products except for insurance or securities; credit rating agency reform; resolution authority for large financial institutions; and regulation of derivatives. Dodd plans to hold one or more hearings on his bill the week of November 16th and expects the committee to markup the bill after Thanksgiving.

Dodd has decided to move ahead without the support and assistance of Ranking Member Shelby (R-AL) and the other committee Republicans. Some are viewing this as a setback given that Dodd and Shelby had made a show in the past year of their shared views on some key parts of the financial reform agenda. Over the past six-to-eight weeks, as Dodd has pushed to pull the package together, it became clear the GOP side of the committee was reticent to come along. While this prevents the bipartisan approach Dodd had wanted, it does free him to take the bold approach it now appears we will see. Given the importance to his re-election of appearing to shake-up the financial establishment, Dodd may benefit from the freedom to stake out this turf. Whether that will contribute to the ultimate enactment of legislation remains to be seen.

Watch this space early in the week for a discussion of the outlook on the House side for continuation of the progress in assembling a comprehensive financial reform package.
 

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While Senate Banking Committee leaders Sens. Chris Dodd (D-CT) and Richard Shelby (R-AL) have been engaged in a public display of bipartisanship about shaping comprehensive financial services reform legislation, it appears difficulties are arising in finding common ground on key issues. What we hear on Capitol Hill is that development of a detailed legislative proposal is now taking place almost exclusively on the Democratic side. GOP involvement has been minimal in recent weeks as Sen. Dodd's team seeks to pull together a draft piece of legislation.

The earlier goal of releasing a bipartisan draft in October and having a committee markup soon thereafter is proving elusive. Committee staff continues to work on a comprehensive measure including the controversial Consumer Financial Protection Agency (CFPA) and—one way or another—we expect something to emerge from that process in the next few weeks. Key committee members believe the CFPA is the one thing on which the Administration will draw a line in the sand, so opponents of that agency should not expect any early "give" on that front from the Democratic side. The major issues on that topic will center on the scope of the agency's authority and the powers it will have.

The issue of systemic risk regulation is under active discussion at the committee and it appears unlikely the Fed will be given that role. One indicator of the Fed's unpopularity at the committee these days is that there appears to be some reticence to move quickly on re-confirmation hearings for Fed Chair Ben Bernanke. Committee leaders would like to avoid hearings that might color the committee's deliberations on financial reform legislation. So even though his term is up at the end of the year, we would not be surprised to see Bernanke's reconfirmation delayed until after the New Year. He can stay in office beyond the expiration of his term, so there is no burning need to get the process completed right on time.

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Ample debate time in Washington can bring the good with the bad. As healthcare reform continues to dominate the congressional agenda leading into the fall, lawmakers have been granted an opportunity to finely tune the legislative details of financial reform—but also a window to resurrect previously rejected ideas from the dead.

This week, House Financial Services Committee (HFSC) Chairman Barney Frank (D-MA) announced his intention to include the so-called “cramdown” legislation into his chamber's broader financial reform package, injecting new life into a divisive proposal that would allow bankruptcy judges to modify mortgages by extending the term, reducing the interest rate, or writing down the principal amount.

During a HFSC subcommittee hearing yesterday to assess the progress of the Making Home Affordable (MHA) Program, Chairman Frank joined a chorus of lawmakers in expressing disappointment that the Obama administration’s loan modification program has not assisted more distressed homeowners. According to Treasury data, MHA has only modified the loans of 12 percent of eligible delinquent borrowers. Figures from some of the large banks are even lower, with Wells Fargo reporting 11 percent of eligible borrowers and Bank of America coming in at 7 percent. Despite the low percentages, the administration is citing statistics that the program has helped reduce the monthly payments of 350,000 homeowners since March.
 

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After a summer of raucous town hall meetings, the dip in President Obama's poll numbers, and the death of Senator Ted Kennedy, members of the House and Senate may well be relieved to return to the routine of the Washington legislative process. With all the turmoil already seen and now expected, there is a flavor of the circus being back in town.

We're actually picturing a three-ring circus— the "main ring" in the middle is where the health care debate is playing out. In the smaller rings we have climate change and financial reform. The action will shift back and forth at various times but all three rings will have their moments of action. While the ultimate fate of climate change legislation is very much in doubt, health care reform and financial reform are better bets to see final or near-final action in the next four months.

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Even Cabinet Members (maybe ESPECIALLY Cabinet Members) need an August break. Various media outlets have reported that Treasury Secretary Geithner delivered an expletive-laced tirade to the principal U.S. financial regulators during a meeting last Friday, in what sources say was a clear show of frustration over the internal opposition to some key elements of the Obama administration's financial regulatory proposal.

Fortunately, for inquisitive lawmakers, several of the meeting attendees were on Capitol Hill today to testify before the Senate Banking Committee on “Strengthening and Streamlining Prudential Bank Supervision,” including Federal Deposit Insurance Corporation (FDIC) Chairman Sheila Bair, Federal Reserve Governor Daniel Tarullo, Acting Director of the Office of Thrift Supervision (OTS) John Bowman and Comptroller of the Currency John Dugan.

Confirming the veracity of the reports, the regulators were also unwilling to soften their criticism, as Bair and her fellow regulators expressed sharp resistance to the administration's proposal to consolidate the bank supervisory functions of the OTS and the OCC into a new National Banking Supervisor -- citing concerns that unified regulation would undercut the interests of community banks and would do little to close the most glaring regulatory gaps that occurred in the non-bank, or "shadow," banking system.

After hearing from the witnesses, Senate Banking Committee Chairman Chris Dodd (D-CT) openly speculated about the administration's plan, commenting that it is “…a thoughtful proposal but I wonder if it is the right prescription.”  Then again, Dodd’s comments may offer more insight on where his mind has focused these past several weeks than about the financial reform outlook.

The House adjourned last Friday and the Senate will adjourn this Friday for the August recess. Dodd is going home to face some challenging poll numbers as he gears up his 2010 re-election campaign. The opinion landscape is shifting rapidly, and legislators may come back in September with some different notions than they left with in August. One thing is for certain, it is going to be a very busy fall.

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The House of Representatives took the first steps towards enacting President Obama’s sweeping financial reform proposal today, voting 237-185 to approve the Corporate and Financial Institution Compensation Fairness Act of 2009 (H.R. 3269) requiring all publicly-held companies to hold non-binding annual shareholder votes and expanding SEC authority over incentive-based compensation structures. Although the bill’s passage represents a major victory for the president and the Democratic Congress, it may prove to be the least controversial element of financial reform, as stark divisions remain on both sides of the aisle concerning the creation of a Consumer Financial Protection Agency and an expanded role for the Fed as a systemic risk regulator.

Unsurprisingly, this afternoon’s vote fell largely along party lines, with only two GOP members supporting the measure and 16 Democrats opposing. The House also approved, by a vote of 242-178, an amendment offered by Chairman Barney Frank (D-MA) that struck language prohibiting “clawbacks ” of executive compensation approved by shareholders. The amendment also inserted language that would prohibit clawbacks of incentive-based pay if a compensation agreement was in effect prior to this bill's enactment.

As the executive compensation legislation moves to the other side of the Capitol, conventional wisdom dictates that the Senate saucer will ultimately cool the House’s hot teacup – but this historical assumption may not apply for this bill.  The executive compensation debate was further inflamed yesterday following the release of New York Attorney General Andrew Cuomo's report showing that the nine largest U.S. banks paid out $32.6 billion in bonuses in 2008 -- a year in which total losses reached $81 billion and nearly $200 billion of taxpayer money was directly injected through the Troubled Asset Relief Program (TARP).  Moreover, a handful of lawmakers on the Senate Banking, Housing and Urban Affairs Committee currently facing tough re-election bids in 2010 – including Committee Chairman Christopher Dodd (D-CT) – will likely avoid putting themselves in a vulnerable political position by advocating reforms that deviate too much from the House legislation.

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Your Financial Reform Watch team has reported before on key legislators' misgivings with the administration's plan to make the Fed the systemic risk regulator for so-called "Tier 1" financial holding companies. Those misgivings are holding sway now on Capitol Hill and are beginning to take hold in the administration itself.

Just yesterday, SEC Chairman Mary Shapiro and FDIC Chairman Sheila Bair were the latest to endorse what Shapiro referred to as a “hybrid approach,” one that would significantly strengthen the president’s current proposal of creating a Financial Services Oversight Council, responsible for collecting data and identifying emerging financial market risks for the Fed. Instead, both Shapiro and Bair envision a council of regulators that would work in concert with the central bank. Additionally, Bair recommended that, in order to ensure independence, the chairman of the council should be a presidential appointee subject to Senate confirmation.

On the Senate side, Banking Committee Chairman Chris Dodd (D-CT) and Ranking Member Richard Shelby (R-AL) are both giving voice to concerns about the enhanced role for the Fed. Shelby has been an outspoken critic of giving the Fed such authority from the start, but Dodd’s statements at a committee hearing yesterday that the “new authority could compromise the independence of the Fed when it provides monetary policy,” and that he “expect[s] changes to be made to this proposal," made it clear the Senate is heading in a direction different from the administration's.

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The quick emergence of GM and Chrysler from bankruptcy has been viewed as a victory for the Obama Administration in demonstrating that the government is focused on moving the companies through their restructuring and keeping them on the road to once again being private companies. Now a majority of Members of the House, including two key Democratic leaders, are pushing legislation that could jeopardize the restructuring plans supported by the White House.

As we write this, a bipartisan group of 240 House Members and 20 Senators are supporting legislation that will allow auto dealers who have lost their franchises in the restructuring to recover them simply by requesting their reinstatement from the auto companies. The legislation was attached to the House version of the Financial Services Appropriations bill last week by a unanimous vote of 60 to 0. The legislation would require Chrysler and GM, at the request of an auto dealer, to restore the dealer franchise agreement in effect prior to each manufacturer’s bankruptcy proceeding. The bill could save around 2000 franchises according to some estimates, although that may be high, since many dealers have already closed. Some had feared the House Rules Committee would remove the language from the Financial Services Appropriations bill, but the language will remain in section 745 of the bill when the House votes on the measure tomorrow.

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The Treasury Department today released draft legislation outlining a central pillar of the Obama administration’s financial regulatory overhaul: the creation of the Consumer Financial Protection Agency (CFPA), an independent regulator with broad authority over “any financial product or service” used by consumers. Seeking to clarify the administration’s June 17th white paper on financial regulatory reform, the legislation provides lawmakers and industry leaders with the statutory details regarding the proposed CFPA.

According to the draft language, in order to continuously monitor consumer risks, the agency—composed of a five-member board led by a presidentially-appointed director subject to Senate confirmation—would collect information related to loans, products, and services from both banks and non-banks. Additionally, consumer financial regulations that are currently divided among several agencies—the Federal Reserve, FDIC, Office of Comptroller of the Currency, Office of Thrift Supervision, Federal Trade Commission, and National Credit Union Administration—will be consolidated within the CFPA. The legislation would have these regulators transfer functions, rules, and employees to the new CFPA within six to eighteen months following enactment. The agency must research, analyze, and report on consumer awareness and understanding of financial products, related disclosure statements, related risks and benefits, and consumer behavior related to such products. The agency would also collect and track consumer complaints and create a new, integrated disclosure form for mortgage transactions, unless the Department of Housing and Urban Development and the Fed can achieve the same goal prior to the transfer of such responsibilities to the CFPA. There are also provisions related to civil penalties and enforcement authority.

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House Financial Services Committee Chairman Barney Frank (D-MA) changed the game yesterday with his announcement that the House would tackle financial reform by considering a series of smaller, targeted bills rather than a more comprehensive reform bill. Frank said he anticipates his committee will move four to six separate bills between July and the end of the year. First out of the gate will be legislation to create a new "Consumer Financial Protection Agency" proposed by the Obama administration.

With Frank’s Senate counterpart, Banking Committee Chairman Chris Dodd (D-CT), fully occupied managing health care legislation, the timeline continues to slip in the upper chamber. Frank remains committed, however, to working the major issues through his committee this summer, and has already scheduled thirteen hearings and markups for July.

There is little doubt Congress will impose new consumer protections on the financial service industry. Whether it will create a new agency to police them remains to be seen. Given budget concerns and other competing priorities, Congress may ultimately determine to enhance the consumer protection requirements, including simplified disclosure, within the existing regulatory framework of the SEC, FDIC, Federal Reserve, and the potentially combined Offices of the Comptroller of the Currency and Thrift Supervision.

House Financial Services Committee Schedule

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The European Commission yesterday put forward its framework proposal on Financial Supervision in Europe. The proposal covers a set of far-reaching reforms to the current architecture of supervisory committees, with the creation of a new European Systemic Risk Council (ESRC) and European System of Financial Supervisors (ESFS), composed of new European Supervisory Authorities. Legislation to embody these proposals will follow in the autumn and will thus be finalized under the leadership of new Commissioners who will be appointed during the summer.

With this initiative, the Commission is responding to the weaknesses identified during the financial crisis as well as to the G20 call to take action to build a stronger, more globally consistent, regulatory and supervisory system for financial services. The proposed financial supervision package involves two key elements.

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The International Monetary Fund’s (IMF) call earlier this week for Europe to conduct stress tests on individual banks has again put the solvency of European banks and the EU’s efforts to clean up bank balance sheets into the spotlight. The solvency ratios of European banks are often lower than those of their US counterparts, making them more vulnerable to write-downs and requirements to raise further capital. The IMF likened the stress tests to a good “spring cleaning.”

Most estimates show that European banks still have significant write downs ahead of them, which in turn will make further government interventions necessary. For instance, the Belgian government on Thursday had to step in to help its troubled banking sector by offering guarantees to KBC Bank. The measure became necessary through the possible default of MBIA Inc, the New York-based bond insurer.

However, European banks argue that US-style stress tests are less applicable to their institutions, because the economic fundamentals and accounting rules are different. The EU officials are also satisfied that individual national regulators have long been conducting stress testing and that there is no need to make them public.

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Congress took the first major step yesterday in levying heavy taxes on bonuses paid to executives of AIG and to institutions who have been recipients of significant (more that $ 5 billion) assistance from the Troubled Asset Relief Program (TARP) in recent months. In a move best described as spasmodic, the House voted 323-93 to place a 90 percent tax on the bonuses of TARP-recipient executives with adjusted gross incomes over $250,000.

Senate Majority Leader Harry Reid (D-NV) moved to bring the legislation to the floor yesterday, but Sen. Kyl (R-AZ) blocked the attempt, saying the Senate needs more time to consider the ramifications. Senate Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Chuck Grassley (R-IA) introduced a bill late yesterday that would impose a 70 percent excise tax—35 percent on the TARP recipient companies and 35 percent on their executives—on excessive bonuses, defined as anything exceeding $50,000 in a calendar year.

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There was plenty of activity in Washington this week but none of it enough to settle the roiling stock market, which keeps sinking like a rock. Is there too much activity or not enough of the right kind of activity?

From the White House and the Treasury—The Obama Administration released the details of its “Making Home Affordable” program, which was introduced in February. With incentives for mortgage holders and servicers, audit and documentation requirements, and qualification limits, major industry players such as the Mortgage Bankers Association and the American Bankers Association reacted positively to the new details.

From the Treasury—Secretary Tim Geithner was on Capitol Hill most of the week defending and explaining the president’s budget proposal, especially the $250 billion “contingent reserve” amount in the Treasury budget to support up to $750 billion worth of asset purchases. Geithner assured the Senate Finance Committee that the $750 billion is not an estimate of future rescue efforts, but rather “just a recognition of reality that it’s possible we’re going to need to do this with more resources.” The Secretary promised to provide more details in the coming weeks on future bailout efforts, including plans for the remaining $300 billion of TARP funds, and the eagerly anticipated public private partnership to take on troubled assets.

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On the first full day of the Obama Administration, key federal officials outlined a potential strategy for managing the government rescue of the financial sector. At his confirmation hearing today, Treasury Secretary-designate Tim Geithner told the Senate Finance Committee that the Obama Administration is considering the establishment of a “bad bank” or an “aggregator bank” that would take over the toxic asset-backed securities currently corroding the U.S. banking system. Several lawmakers have suggested the concept of a federally-operated entity modeled after the Resolution Trust Corporation, which, from 1989 to 1995, took over and liquidated 747 failed thrifts with assets of $394 billion. An aggregator bank would cost several trillion dollars according to various experts, including former Federal Reserve Chairman and current Obama economic advisor Paul Volcker.

Today Geithner assured the Senate panel that President Obama “will come before the Congress in the next few weeks and lay out to the American people a comprehensive plan to help stabilize the core of the financial system so that banks, which are so critical to our economy, are able to provide the credit necessary to get recovery going again.” He also promised to reform the TARP program with increased taxpayer protections, transparency, foreclosure mitigation for homeowners, and access to credit for small business owners.

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The Senate returns to work today and the House is scheduled to convene on Wednesday. In the past several days, it has become clear that neither significant economic stimulus nor aid to the auto industry is likely to be approved during this "lame duck" session of the 110th Congress. The sticking point appears to be the inability of Democratic leaders to attract sufficient Republican support for either measure.

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Last night's Senate vote on the financial rescue plan, a 74-25 victory, followed the pattern of Monday's House vote. The more conservative and liberal Senators voted against it as well as Senators in tight races. Since only one-third of the Senate must stand for re-election, the third category had much less impact than in the House.

On the House side, there are signs of positive movement on both sides of the aisle. Based on conversations with our contacts on the Hill, we believe as many as 20-25 members who voted against the package on Monday may now support the plan.

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The Senate passed the financial reform package tonight by a vote of 74 to 25. We'll have more analysis in the morning and a look ahead to House action.

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With confidence in Senate passage running high, Washington's attention -- and Wall Street's -- is turning back to the House. House Majority Whip James Clyburn (D-SC) told reporters this afternoon that he expects the House to vote on the Senate rescue package on Friday. On Thursday, the House will likely debate the "rule" for the package, which dictates whether and how members can amend the legislation.

Discussion today has focused on the impact in the House of the items the Senate is adding to the legislative package. The calculus involved is illustrated by looking at one of the "add-ons," the one-year fix for the alternative minimum tax (AMT). If Congress does not alter the AMT, as many as 22 million additional taxpayers, including many middle income taxpayers, could confront it in April. The House recently voted on a stand-alone AMT relief bill on September 24, and 393 members voted for it – 200 Democrats and 193 Republicans.

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Last night Senate leadership announced that the Senate will vote today on the financial rescue plan. The only substantive change announced to the previous package was the lifting to $250,000 of the cap for FDIC insurance coverage of deposit accounts.

Sen. Chris Dodd (D-CT), Chair of the Senate Banking Committee, said he will offer an additional amendment, but that it will only include "agreed upon" items.

In a move that may complicate things somewhat, the Senate has also attached to the package a tax break extender bill covering a number of provisions. This legislation has been "ping-ponging" around the Capitol for months, with the House and Senate leaders differing over the approach.
 

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The stock market closed a few minutes ago and today's increase of 485 points in the Dow Jones Industrial Average is indicative of the view that Washington is moving past the shock of yesterday's House vote and towards a new push to enact a financial rescue package.

Key leadership players have been working hard today to rally the troops and change the package in ways that will garner additional votes in the House. The White House conducted a series of outreach calls today to groups ranging from GOP "insiders" to representatives of state and local government and other advocacy organizations. All of this was designed to drive home the point that action is needed on a plan very much like the one put before the House yesterday. Congressional leaders have been doing likewise. Individual Members of Congress -- many of whom have gone home for the two day Rosh Hashanah break -- are also hearing from their constituents. Given the recent tenor of constituent input, that may not be helpful.

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Progress towards action in the House and Senate continues apace. House leaders expect a vote on the Emergency Economic Stabilization Act tomorrow. The Senate will take up the measure as well, but action on Monday may be limited to filing a cloture petition, which would mature on Wednesday. The Senate could vote tomorrow if leaders can obtain a unanimous consent agreement, but that is difficult.

While the bipartisan, bicameral leadership appears united on approving the package, there is enough opposition on the right and left to make things interesting. This is particularly true in the House, where some influential members on both ends of the spectrum are organizing opposition.

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House and Senate negotiators and the Administration reached a deal overnight on the financial rescue package. Staff has spent a sleepless night drafting and a vote in the House is expected as early a this evening.

Our next report will have more details, but the plan does include the following

• A total of $ 700 billion for investment in troubled assets.
• A phased approach to releasing funds as described in our report last evening.
• A requirement for the president to submit a plan for recouping lost funds if the program does not turn a profit upon the sale of assets.
• Limits on "golden parachutes" for executives of forms from which assets are purchased.

The other elements are largely along the lines readers of these reports will expect.

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Leading negotiators from the House and Senate began a negotiating session at noon today with a goal to work as long as it takes to resolve the 15 issues remaining on the table. They are taking a break as we write this, with plans to return to their discussions this evening. Secretary Paulson is in the Capitol to assist the negotiators and ensure the Administration's views are being taken into account. Momentum continues to build towards the announcement of a deal by Sunday afternoon. Leaders of the House and Senate hope to have votes on Monday, but the complexities of drafting the legislation may require that votes be pushed off until after Rosh Hashanah which ends on Tuesday at sundown.

As this afternoon's negotiating session began Sens. Judd Gregg (R-NH) and Mitch McConnell (R-KY) both said the Senators and Representatives meeting today would stay in the room until a deal was reached. While that may be over-optimistic, it is indicative of the fact that these leaders are feeling pressure to get something accomplished.

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The Dow Jones Industrial Average is ending the week with an increase of 138 points based on today's news that discussions over the financial rescue package are moving forward. Expectations for enactment of a package are such that key legislators are now pointing to the opening of the Asian markets on Monday, which takes place Sunday night East Coast Time, as the deadline for, at the very least, having a consensus rescue package ready for passage.

At this point, there are four key negotiators finalizing the terms of a legislative compromise: House Financial Services Chairman Barney Frank (D-MA), Senate Banking Committee Chairman Chris Dodd (D-CT), House Minority Whip Roy Blunt (R-MO), and Senate Budget Committee Ranking Member Judd Gregg (R-NH).

Senate Minority Leader Mitch McConnell (R-KY) held a news conference earlier this afternoon declaring that Gregg has full authority to represent Senate Republicans. Gregg, who appeared with McConnell, told reporters the markets are "telling us we better do something, and they're telling us in pretty stark terms." While Gregg agreed there are still "knotty and difficult issues" to negotiate, he said they are making progress.

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Momentum continues to build for enactment of the $700 billion Administration plan to buy troubled assets from financial institutions. As an indicator of the increasingly upbeat mood around the package, the Dow Jones Industrial Average increased by over 200 points for the day.

As we write this, President Bush is meeting with Sens. McCain and Obama and Congressional leaders to discuss how to advance the plan. While this meeting is viewed by many as a sideshow, a forceful statement by the sitting president and the two men seeking to replace him will add to the overall sense that action on Capitol Hill is soon possible.

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There has been a seismic shift in Congressional attitude over the past 48 hours. Skepticism over the administration’s plan has evolved into hardened resolve to achieve consensus and pass a financial relief package as soon as possible. People are still reluctant to commit to a timeframe, but the pace has quickened. Whereas two days ago, Senate staff were waiting for their House counterparts to draft a plan, reports now indicate that both sides began working together yesterday to craft a single, unified plan.

Publicly, several lawmakers, including Senate Banking Chairman Chris Dodd (D-CT) and House Financial Services Chairman Barney Frank (D-MA), have said Congress and the administration are very close to striking a deal in the next “day or so.” At 10 a.m. this morning Frank hosted Dodd as well as Sen. Bob Bennett (R-UT), a senior member of the Senate Banking Committee, and Rep. Spencer Bachus (R-AL), the ranking member of the House Financial Services Committee, to continue drafting the plan. We have reports that the drafting session will expand to include others and will continue all day. Congressional leaders are working to have a consensus plan by today’s 4 p.m. meeting at the White House with President Bush and the presidential candidates.

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Spending their every waking hour on Capitol Hill trying to convince lawmakers to accept the financial bailout plan may finally be paying off for Treasury Secretary Paulson and Fed Chairman Bernanke. Reports coming out of meetings held this morning and early afternoon have been decidedly more upbeat than anything we have heard thus far.

In addition to testifying at hearings and briefing large groups, Paulson held a private meeting earlier with House Speaker Nancy Pelosi (D-CA) and Minority Leader John Boehner (R-OH). While aides would not confirm whether the leaders and Paulson struck an agreement, there are signs the administration has made changes to the Paulson plan. In his House Banking Committee testimony this afternoon, close watchers noted that Paulson modified his remarks to allow for a compromise on limiting executive compensation as long as it does not "undermine the effectiveness of the program."

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Washington continues its bipolar approach to dealing with the Bush Administration's proposed plan to purchase, manage and sell troubled assets from financial institutions. Key leaders continue to work on the contours of a plan so that it can be voted on late this week. At the same time, rank and file Members, particularly on the GOP side, are turning up the volume on their objections. We continue to believe prospects are good for enactment of a plan to create a $700 billion investment to purchase assets. However it is clear that several pounds of flesh will be extracted from Secretary Paulson along the way.

Since yesterday, it has become more evident that executive compensation limits of some kind will be included in the final plan. The Administration still opposes this strongly, but they will have little choice but to accept it. Otherwise, there appears to be agreement on including outside oversight over Treasury on the program, protections against foreclosures on homeowners, and the option for Treasury to take warrants for stock from companies that sell assets to them.

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This morning’s Senate Banking Committee hearing was still continuing as the Bush Administration, House Banking Committee Chairman Barney Frank (D-MA), and House leadership were making plans for an urgent briefing today at 4 p.m. to convince House members to agree to the Treasury’s Troubled Asset Relief Program (TARP). Press reports about this morning’s House Democratic and Republican conference meetings characterized members’ reactions as “resistant.” Our sources on the Hill and off are saying the meetings were worse than reported, and the mood at both was antagonistic. As of now, the House does not have anywhere near the 218 votes needed to pass the Treasury plan, even with Chairman Frank’s endorsement.

Members of the Senate Banking Committee, including Sen. Chuck Schumer (D-NY), questioned whether the TARP could be funded in installments, precluding the need for Congress to authorize $700 billion in one lump sum. However, both Federal Reserve Chairman Bernanke and Paulson rejected the suggestion, saying that bolstering consumer confidence requires Treasury to have the full $700 billion authority, even if they do not utilize the entire amount. Both Paulson and Bernanke repeated on several occasions that lawmakers must not view the $700 billion as an expenditure, but as an investment that would be recovered – though perhaps not in full – over time.

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While congressional leaders and the Administration continue to make progress in developing a compromise $700 billion package to shore up the financial markets, this morning’s news is that skeptics in both parties are making their voices heard very strongly. This skepticism is not likely to derail the plan altogether, but it may slow its path to enactment.

Events in public and in private this morning have brought out the opponents of Secretary Paulson’s plan. A public hearing at the Senate Banking Committee began at 10 a.m. this morning and continues as this is written. At the hearing, Fed Chairman Ben Bernanke emphasized the importance of quick action on the plan. He said financial institutions continue to be at risk and the pending plan will be important to staving off further failures. Secretary Paulson pressed again for a “clean” piece of legislation (meaning with minimal add-ons) but also telegraphed some flexibility on issues like oversight and mortgage assistance for homeowners. Members of the committee from both sides of the aisle hit the Administration hard for pushing a plan that appears to be a “blank check” for the Treasury Secretary.

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