Wrangling holds up US rescue

Financial Times
By Daniel Dombey, Krishna Guha and James Politi in Washington and Andrew Jack and Michael Mackenzie in New York
Published: September 25 2008 19:18 Last updated: September 26 2008 04:23
An unprecedented White House emergency meeting broke up on Thursday night after failing to reach full agreement on the Bush administration’s financial rescue package after another day of intense stress on the money markets.
In an outbreak of political wrangling, a hard core of Republicans on Capitol Hill maintained their resistance to a deal, even as John McCain and Barack Obama, the leading candidates in November’s presidential elections, met President George W. Bush and congressional leaders to hammer out a compromise.
The setback in the talks forced Hank Paulson, US Treasury secretary, and Ben Bernanke, chairman of the Federal Reserve, to return to Capitol Hill late on Thursday for a new round of discussions with legislators.
Further talks were expected to resume on Friday.
Earlier in the day, hopes for a bail-out deal rose after senior politicians from both parties endorsed principles granting the administration the the full $700bn (£380bn) it sought, but with a first tranche of just $250bn and a further $100bn available without further congressional approval. Congress would get a chance to vote on the remaining $350bn at a later date.
The proposed compromise also modified the administration’s original proposals so as to prevent “inappropriate executive compensation for participating companies”. It would allow the federal government to take stakes in the companies assisted under the plan and establish a powerful oversight board.
But by mid-afternoon, progress had stalled, after a group of House Republicans circulated an alternative plan that would set up an emergency insurance fund for financial institutions instead of the proposal to purchase troubled mortgage assets presented by the Bush administration.
The disarray in the bail-out negotiations became even more apparent after the White House meeting, which one congressional aide described as having been extremely fraught.
“We haven’t gotten agreement,” said Richard Shelby, the senior Republican member of the senate banking committee, after emerging from the White House meeting. “There’s still a lot of different opinions. Mine is it’s flawed from the beginning.”
Mr Obama steered clear of criticising Mr McCain after the White House meeting, saying “eventually there will be a deal” and placing blame on the dissident Republicans for the hold-up in the deal. Although Democrats hold a majority in the House, Nancy Pelosi, the speaker, has made it clear she wants the unpopular bail-out legislation to be agreed on a bipartisan basis.
After the White House meeting, Mr Paulson knelt down in front of Ms Pelosi, imploring for her help in passing the legislation
Before Mr Paulson headed up to Capitol Hill on Thursday to revive the talks, a Treasury spokeswoman issued a statement urging members of “both parties” to complete the legislation quickly. “There are still open issues to be resolved, and we are committed to resolving them,” she said.
The S&P 500 finished up nearly 2 per cent and had shrugged off a profits warning from General Electric amid hopes that Congress would pass the plan. The dollar was broadly firmer and Treasury yields had risen.
But conditions in the money markets remained deeply distressed, with short-term rates rising further and lending beyond overnight largely paralysed.
Hans Jorg Rudloff, Barclays Capital chairman, said: “Anyone looking at the money markets would come to the conclusion that we are one minute before a terminal heart attack. Therefore the rescue package will pass. There is no choice.”
Weekly data on commercial paper from the Federal Reserve showed a fall of $61bn in outstanding volume, the biggest weekly dip since August 2007.
Three-month dollar Libor rose 29 basis points to 3.77 per cent.
If this key borrowing rate does not soon ease, the Fed may be forced to attack it directly with three-month liquidity operations.
Meanwhile, data revealed the massive increase in Fed liquidity support over the past week, including $73bn in indirect loans to money market funds and a near doubling of its direct lending to investment banks and other primary dealers.
The talks followed an announcement the day before by Mr McCain to suspend his presidential campaign. But the Obama camp resisted Mr McCain’s calls to delay the first presidential debate, scheduled for Friday.
“Now that we’re on the verge of making a deal, John McCain drops himself in to make a deal,” said Barney Frank, chairman of the House financial service committee. “I worry about this politicisation of it.”