Bailout trips, market dips on mortgages

Negotiations over a massive  package to stabilize the roiling markets have boiled down to a partisan disagreement over whether to empower bankruptcy judges to readjust mortgage rates.

House Republican and Democratic leadership sources say the bankruptcy court proposal, which Republicans derisively call a cram-down provision, has emerged as the most difficult difference to resolve in negotiations with the administration.

{mosads}House Financial Services Committee Chairman Barney Frank (D-Mass.), who is leading negotiations with the Bush administration, has predicted an agreement will be reached by the end of the week.

But delay caused by a dispute over greater flexibility for bankruptcy courts and restrictions on compensation of executives who take part in the bailout program could give opponents crucial time to organize a counterstrike.

Growing criticism of the bailout has rattled the financial markets. Stocks dropped significantly for the second day in a row following Treasury Secretary Henry Paulson’s chilly reception on the Hill.

Doug Roberts, chief of investment strategy at ChannelCapitalResearch.com, said investors watched Paulson’s testimony closely and are trying to decide whether lawmakers’ criticism is political posturing before an election or represents hardening opposition.

Republican discontent with the package appeared to grow on Tuesday, spurring Paulson to meet with the Senate Republican Conference after more than four hours of testimony before the Senate Banking Committee.

Congressional and Bush administration negotiators are also still working to reach an agreement on a provision that would give taxpayers a financial stake in the distressed assets that the Treasury Department is proposing to buy from troubled financial firms in a bid to kick-start the economy.

But Democrats and Republicans familiar with negotiations say this proposal, which would give taxpayers a chance to profit if the toxic assets recover, has sparked less controversy than the bankruptcy and executive pay issues.

Paulson and Federal Reserve Chairman Ben Bernanke testified before the Senate panel Tuesday to defend a proposal they submitted to Congress over the weekend.

Republicans turned out to the harshest critics of the Treasury proposal, reflecting growing worries within the GOP that could derail the $700 billion package.

“What troubles me the most is that we have been given no credible assurances that this plan will work,” said Sen. Richard Shelby (Ala.), the ranking Republican on the Senate Banking panel, who has become a leading critic of the Treasury Department’s plan. “We could very well spend $700 billion and not resolve the crisis.”

Sen. Jim Bunning (Ky.), another Republican on the committee, warned: “This massive bailout is not the solution, and it is financial socialism, and it is un-American.”

Democratic leaders have decided to move the Wall Street package in the same way they passed an economic stimulus earlier this year, said House and Senate sources.

As happened with the earlier package, House negotiators will try to reach agreement with the Bush administration on the main components of the bailout and then send it to the Senate for approval.

Frank said Monday evening that administration officials have agreed to implement an oversight board to review the purchase and management of distressed assets by contractors hired by the Treasury Department. He said discussions continue over finding ways to give taxpayers a stake in distressed assets, which may recover value if the market stabilizes.

Negotiators are considering giving taxpayers equity stakes or rights to purchase stock in the future at current, lower prices.

{mospagebreak}Frank, however, said Democrats and the Bush administration remain far apart on a proposal to give bankruptcy judges more power to adjust mortgage rates and another to limit the pay of executives who sell distressed assets to the government.

Some Senate Democrats are worried about the total cost of the package. Sen. Charles Schumer (D-N.Y.) has proposed splitting it up into $150 billion increments Congress could approve periodically. But Paulson dismissed the suggestion Tuesday as insufficient to instill market confidence.

Senate Majority Leader Harry Reid (D-Nev.) reiterated Tuesday afternoon the importance of giving bankruptcy judges greater flexibility. He noted that judges can readjust mortgage terms if a borrower facing bankruptcy owns multiple homes.

{mosads}Republicans say they are willing to curb executive compensation but remain inflexible on greater power for bankruptcy judges. One Republican familiar with the talks said the proposal would undermine the sanctity of financial contracts and could also erode the value of the very distressed assets the Treasury Department is proposing to buy.

While House and Bush administration negotiators are spearheading the discussions over the scope and content of the package, its ultimate passage will likely depend on Republican support in the Senate. This was signaled Tuesday by Reid’s plea for Republican votes and Paulson’s unusual effort to meet privately with GOP lawmakers after undergoing several hours of testimony.

Paulson warned GOP lawmakers that the health of the economy was at stake and that if Congress did not pass the bailout within the next week it could destabilize the markets further, said GOP sources in attendance.

Several Republicans who remained unconvinced after the meeting said they need more details about how the administration plans to run the market relief program.

“Are we going to let the stock market going up and down control what we do here?” said Sen. George Voinovich (R-Ohio). “For us to do something [Wednesday] without getting more of the details on it would cause the American people to wonder whether or not we were really doing our work.”

Other Republicans, such as Sen. Wayne Allard (Colo.), question whether the massive program will even work.

Market analysts share those concerns.

“There are two levels of concern,” said Roberts, of ChannelCapitalResearch.com. “On one level the question is whether this thing is going to work.”

Roberts said capital providers also want to know the details of the bailout: “What they’re finding is that it’s all very sketchy.”

J. Taylor Rushing contributed to this article.