Partisan standoff on bailout; candidates' debate in doubt

Conservative Republicans push changes

Barney Frank spoke to reporters after a meeting with other Congressional finance leaders. Standing alongside Frank (from left) were Representative Spencer Bachus, Republican of Alabama, Chris Dodd and Senator Jack Reed, a Rhode Island Democrat. (kevin lemarque/Reuters)

WASHINGTON - A high-stakes White House meeting that was supposed to seal an agreement on a $700 billion plan to avert financial disaster on Wall Street unexpectedly dissolved into a heated argument over an alternate proposal by conservative Republicans, leading congressional leaders to clash over a deal that had suddenly turned sour.

"This is deteriorating," President Bush declared as the meeting grew more heated, according to one of the participants.

Minutes later, Senator Richard Shelby, an Alabama Republican and ranking member of the Senate Banking Committe, emerged from the White House and declared that earlier reports of an agreement were premature. The agreement, he told reporters, "is no agreement," adding that Bush's rescue plan was "flawed from the beginning."

With the efforts to form a bipartisan agreement rapidly eroding, Treasury Secretary Henry M. Paulson buttonholed several Democratic leaders in a White House chamber, urging them not to walk away from the deal, ac cording to House Financial Services Committee chairman Barney Frank of Massachusetts.

" 'I know how frustrated you are by what happened. Let me work this out. Don't blow it up,' " Frank recalled Paulson as saying.

Angry Democrats later accused Republican presidential nominee John McCain of throwing the deal off track, trying to upstage the negotiations in an effort to help his campaign.

Senate Banking Committee chairman Chris Dodd of Connecticut - who earlier in the day announced that a bipartisan deal had been reached - said after the White House meeting that McCain was engaged in "political theater" for injecting himself into the negotiations between Congress and the White House.

"This looked to me like it was a rescue plan for John McCain," Dodd said on CNN.

The fast-moving turn of events left in doubt whether McCain and Barack Obama, his Democratic rival, would engage in tonight's scheduled presidential debate in Mississippi.

The Dow Jones industrial average rose 196.89 yesterday, ending at 11,022.06, apparently in reaction to the midday report that a tentative deal had been reached. The White House meeting started just after the markets closed.

Over the course of five hours yesterday afternoon, the deal went from being all but certain to highly uncertain, leaving it unclear whether Congress could put it back together today.

Bush arranged the White House session in hopes that it would end with the public announcement of a bipartisan agreement, followed by quick ratification by Congress.

The deal seemed headed for passage after Democratic and Republican leaders announced at a midday press conference that they had reached a tentative, general agreement based on the Bush administration's $700 billion plan.

But several hours later, with Obama and McCain sitting at opposite ends of the table in the White House Cabinet Room, conservative Republicans raised objections and put their own plan on the table. A heated discussion followed, and the talks collapsed.

At the start of the meeting, when television cameras were allowed for the traditional photo opportunity, McCain and Obama smiled but did not answer questions.

During the meeting, the candidates spoke about the importance of addressing the financial crisis, according to some participants. The two presidential candidates, they said, were not central players, but instead commented on the clash among congressional leaders.

McCain said the views of Republicans must be heard, while Obama said Republicans should reach agreement among themselves in order for a deal to go forward. When the meeting was over, McCain and Obama left in separate motorcades, avoiding the waiting press corps in the White House driveway. They later appeared in television interviews as congressional leaders raced back to Capitol Hill and prepared for a late-night negotiating session.

Both Paulson and Federal Reserve Chairman Ben Bernanke went to Capitol Hill last night to try to help broker a deal but met strong opposition from House Republicans.

Democrats said they were surprised by the proposal of House Republicans, which was provided to participants at the White House meeting with few details. They said they had not heard anything about it until just before the meeting.

"I'm certainly not going to sign on to something that gets raised this afternoon," Dodd said.

Under the Bush plan, the government would buy the bad mortgage-related debt and try to reclaim the cost by selling the assets.

But the new proposal called for "capital gains tax relief," which apparently refers to a cut in capital gains tax. The plan also called for "mortgage insurance," which apparently refers to government insurance provided to financial institutions. Rather than sell to the government, the distressed companies would keep the toxic mortgage-backed securities.

Backers of the alternative proposal included House Minority Leader John Boehner, an Ohio Republican. The plan, they insist, would eliminate the need for $700 billion in taxpayer money, but Frank said that the Bush administration already has rejected the idea.

It was uncertain last night if negotiations could be restarted.

Democratic leaders said that, given the new proposal, they didn't know whom to negotiate with: Paulson and the White House or the conservative Republicans. The turn of events put Democrats in the unusual position of siding with Bush, and put the president at odds with conservative members of his own party.

Earlier yesterday, it seemed the package was moving forward quickly.

At the midday press conference, Democratic and Republican leaders said they had reached agreement with the Bush administration on key sticking points, including a provision to give the government a stake in the distressed firms. The White House also agreed to limit compensation of some Wall Street executives and be overseen by a bipartisan panel.

Frank, who played a key role in the negotiations, said that most of the bipartisan modifications were approved during several days of bargaining with Bush administration officials. He played down the influence that McCain and Obama would have at the White House meeting.

"I'm glad that we'll be able to go and tell them that there really is not much of a deadlock to break, but I'm always glad to get to go to the White House," Frank said at the midday press conference. Congress was "on track" to pass the legislation, he said.