In Congress, deal on bailout taking shape as rancor eases

House Republican whip Roy Blunt (right) and House Republican leader John Boehner talked to reporters yesterday. There was guarded optimism about weekend bailout talks. (Lauren Victoria Burke/AP)

WASHINGTON - A group of conservative Republicans yesterday insisted on significant changes to a $700 billion Wall Street rescue package proposed by the Bush administration, but the angry tone that led to a breakdown of negotiations over the package at the White House on Thursday had changed to guarded optimism that weekend negotiations would yield a bipartisan deal and stave off an economic collapse.

Democrats once again signaled that they are willing to accept a modified version of Bush's proposal to use taxpayer money to buy up bad mortgage-related debt from distressed Wall Street firms, with added provisions that limit executive compensation in participating firms, provide the government with a stake in the distressed companies getting help, and create a bipartisan board that would oversee the program.

But the opposition GOP group, including much of the party's House membership and some influential senators, proposed an alternative to the highly unpopular buyout plan: a government-backed insurance program for firms that are holding the toxic debt, combined with cuts in the capital gains tax to bring more private financing into the system.

As lawmakers and their staffs worked into the night, the central question on Capitol Hill yesterday was whether the breakaway Republicans would agree to meld their proposal with the Bush plan or insist on a separate vote for their package. Democrats said they wouldn't allow a vote on any rescue plan without a significant number of Republicans helping to shoulder the political burden.

"We can't do it alone," Senate majority leader Harry Reid said at a press conference earlier yesterday. "We need the House Republicans to join us."

House Republican whip Roy Blunt of Missouri, whom the GOP leadership appointed to represent the House members in negotiations, said he was entering the talks "with every intention of having a real negotiation, of having a bill that House Republicans can vote for and solving this problem and solving this as quickly as we can."

At the White House yesterday morning, Bush sought to restart stalled negotiations that fell apart at a meeting he convened Thursday. He gave a brief statement expressing optimism that a final package would reach his desk soon.

Although he acknowledged there are "disagreements over aspects of the rescue plan," the president said at the White House, "there is no disagreement that something substantial must be done. The legislative process is sometimes not very pretty. But we are going to get a package passed."

The Dow Jones Industrial Average rose 121.07 points, to 11,143.13, on expectations that a deal was in the offing. But the financial news also included a grim reminder that the economy is still in treacherous waters: Washington Mutual, one of the nation's largest banks, collapsed overnight, was taken over by the government, and sold to JP Morgan Chase & Co.

House Financial Services Committee chairman Barney Frank of Massachusetts, who has played a key role in the talks, said negotiations seemed headed in a positive direction. On Thursday, Frank was among several lawmakers at a midday press conference to announce that Republicans had agreed to a deal, only to learn several hours later that the plan had fallen apart when the alternative Republican proposal emerged.

Frank - who said he felt as though he were in the middle of a Republican civil war - urged the GOP to reach a consensus to help the negotiations. By yesterday afternoon, Frank felt confident enough to predict that by Sunday "we will have an agreement people can understand."

He also predicted House Republicans would sign on to a deal in which their insurance-based plan would be a component of the proposal, not a replacement for it. The breakaway GOP caucus "is willing to accept it as an option," Frank said.

Still, it remained unclear by late yesterday afternoon if House Republicans were willing to accept the initial $700 billion buyout plan as the cornerstone of the rescue package.

Frank said that could be a deal-breaker: "If you don't accept the Paulson plan, there's no point in negotiating," he said.

One possible deal was suggested yesterday by Representative Eric Cantor, Republican of Virginia, who told CNN that the Wall Street rescue package should incorporate elements of both plans. He said lawmakers should give the Treasury Department the option of buying the worst mortgage-backed financial instruments while insuring other, healthier mortgage-related securities debt that is more likely to be profitable in the long run.

"There are plenty of these assets that are so beyond assessing their risk that we're going to have to purchase," said Cantor, who is playing a key role in the negotiations. "But for those classes of assets that have a track record. . . the government can provide insurance there. That insurance can be paid for by a premium by the people who own those assets."

House Republicans, still smarting over a series of votes they felt the White House forced on them - including a 2003 Medicare prescription drug benefit plan few liked - were worried about being corralled into voting for yet another expensive bill that would cost them their free-market credentials, and maybe their House seats, in the process.

Representative Jim McCrery, Republican of Louisiana, said the GOP was "still vetting our proposal."

Other House Republicans said they didn't want to be arm-twisted into approving a package that they disliked by a lame-duck president.

"The only thing we have to fear is the fear-mongering" of Paulson, said Representative Louis Gohmert, a Texas Republican. His party is willing to negotiate, he said, but "they're not going to fall on the sword."

Representative Kay Granger, a Texas Republican, said she's also heard plenty of complaints from constituents back home. "We've had hundreds of people say, 'We pay our bills. Why can't Wall Street pay theirs?' " she said.

The negotiations went forward without presidential candidates Barack Obama and John McCain, who attended a dramatic high-stakes White House meeting Thursday with Bush and congressional leaders, a session that deteriorated into rancor. Both Obama, the Democratic nominee, and McCain, his Republican counterpart, left Washington yesterday morning to attend their debate in Oxford, Miss.

Democrats blamed McCain for leaving the campaign trail to elbow into the bailout negotiations. "The insertion of presidential politics has not been helpful," Reid said earlier.

But two influential Republican senators, Minority Leader Mitch McConnell of Kentucky and Judd Gregg of New Hampshire, said McCain offered useful suggestions and helped underscore their philosophical opposition to the deal. Pressed several times, however, neither McConnell nor Gregg - who was closely involved in the negotiations - would say which specific proposals McCain made at private GOP meetings on Thursday.

Still, Republicans insisted that McCain's presence alone had been a game-changer, drawing more attention to the crisis and forcing lawmakers to move.

"I think McCain helped the situation," said Representative Jeff Flake, Republican of Arizona. "He came and said the taxpayers deserved a better deal."

Frank, however, said McCain had been an "obstacle" in the negotiations. "The facts are very simple: before McCain came in, we thought we were close" to a deal, Frank said.