JEFFREY BROWN: And for that, we turn to two congressional correspondents covering this story closely. Martin Kady is with Politico.com, and John Shaw is with Market News International, a global wire service that reports on financial markets.
Well, we heard we have a deal; we heard we don’t have a deal. Where do things stand?
JOHN SHAW, Market News International: I think this is one of the most complex negotiations Washington has seen in a long time. It’s almost like three-dimensional chess, in which you have at one level the leadership of the Financial Services Committees — Barney Frank and Chris Dodd — and some members, Democrats and Republicans, trying to put together a deal that roughly reflects what the Treasury secretary, Henry Paulson, offered.
Then, at another level, you have the leadership trying to figure out what kind of package could pass their respective chambers, so the House speaker, Nancy Pelosi, Senate Majority Leader Harry Reid, and their Republican counterparts.
And then, you have, as we saw, the White House negotiations going on, which are even further complicated by the emergence of the presidential candidates.
So you have a shifting cast of characters. Some people think there’s an agreement; others say there’s no agreement. And it’s been a really complicated negotiation to follow.
JEFFREY BROWN: Martin Kady, what’s your assessment of the day? Where are we?
MARTIN KADY, Politico: Well, I still think that we’ll have something by the weekend. Maybe I’m overly optimistic.
But the House Republicans were not in on the morning negotiations. Boehner was not in this meeting. And you noticed that Senator Shelby came out and he said, “We don’t have a deal.”
Well, Shelby is the ranking Republican on the Senate Banking Committee. He was not in the negotiations this morning, either, so he might be a little bit of an outlier on this.
But if the presidential candidates leave town, it might actually be easier to get something done.
JEFFREY BROWN: We’ll come back to them, but where do you see the main hang-ups right now?
MARTIN KADY: Well, the hang-ups are on a couple of things. The general bailout authority has support in both chambers, with the exception of a sort of hardened group of House conservatives, the general authority to give the Treasury secretary the ability to buy up to $700 billion in bad debt, basically. I think they settled on that.
It’s these areas around the fringes, such as how you handle executive compensation, whether they put some sort of a cap or a limit on how much you pay the executives of companies that are getting a bailout.
The other thing that Democrats are really trying to get in there, which they probably won’t, is a bankruptcy provision that would allow bankruptcy judges to renegotiate mortgages for people facing foreclosure. That’s a poison pill for Republicans, but it’s something that a lot of housing advocates and a lot of more liberal Democrats would love to get in there.
Web of negotiations, hang-ups in DC
JEFFREY BROWN: You know, we heard Barney Frank and others earlier today saying that a lot of those things, he thought, had been worked out, executive compensation and homeowners initiative, and yet are they or not?
JOHN SHAW: Well, it's hard to know, because there are times when they leave meetings with the Treasury secretary in which they think that they've got at least signals that Secretary Paulson can agree.
And then you'll have another press conference in which you'll have Republican leaders saying, "No, those things are still very much on the table and haven't been nailed down."
So it's hard to know even who the principal negotiators are, which makes it difficult to track these talks.
JEFFREY BROWN: Is it hard to know still what the main hang-ups are? Or do you think we just ticked off the main ones?
JOHN SHAW: I do. And I think Martin laid them out nicely. I think, to me, the big kind of conceptual problem is that leaders on both sides are trying to find language to explain to their constituents back home why this $700 billion bailout is not, in fact, a bailout to Wall Street, why it is a step that would actually help individual Americans in their day-to-day lives.
So there's a real struggle to translate what they're doing here into language that people back home can understand.
JEFFREY BROWN: I mean, this -- it goes without saying, but it's worth saying that a lot of this is being driven by what they're hearing at home.
MARTIN KADY: Yes, and this is the fundamental political challenge of this bailout. I mean, it's easy for people to call and say, "Don't bail out Wall Street." That's a very unpopular stand.
But the president last night in his address and what members of Congress are trying to do is explain that, if we don't do this, then your child's college savings will go down dramatically. Your 401(k) is going to take a huge hit.
And it goes even beyond that. If the credit markets are frozen, you won't be able to borrow money to open the McDonald's franchise down the street. You know, people won't be able to borrow money for their auto loans.
So the trickle-down effect is very fast. And that's what people are trying to explain, but it still doesn't have great support sort of among voters and especially among fiscally conservative Republicans.
JEFFREY BROWN: When we look at the things that are on the table that seem to have been agreed to, one new thing I heard that's out there is this idea of phasing in the money. Tell us about that part.
MARTIN KADY: Yes, I mean, this is sort of like, "Let's take this one step at a time." One of the ideas is to give a tranche of money, $250 billion, instead of $700 billion all at once. And then they'd add another $100 billion, and the second half of it would need a congressional signoff.
So, you know, you could make a comparison to, like, an NFL player who's on an incentive contract. Like, if you do well, we'll give you the rest of your money. So, I mean, that's one way to sort of make the pill a little bit easier to swallow.
JEFFREY BROWN: Does that...
JOHN SHAW: I was going to say, the one thing that's interesting there, in yesterday's hearing, the Fed chairman, Ben Bernanke, was asked about, you know, what's wrong with breaking this up and doing it in increments.
And the point he made is one thing we're trying to do is really show the financial markets that we're going to come in with big muscle, and $700 billion is big muscle. And he said, if there's any sort of sense that maybe Congress will trim it back or cut it back or not really deliver, it sort of dilutes the sort of shock and awe that they had hoped to deliver by having this package come through.
JEFFREY BROWN: Yes, of course, the other side of the big muscle here is the fear or the concern that the Treasury secretary has too much muscle, right? I mean, that's what Congress is looking at, their oversight. What's their role here?
MARTIN KADY: Right. I mean, there's a lot of skepticism on the part of the Democratic Congress. They feel like they've heard this theme before, "We have a national emergency. The administration wants enormous, unprecedented powers. And by the way, Congress, you need to act right now."
They feel like they heard that with the run-up to the Iraq war, with the Patriot Act. So they want to put in a lot of oversight, an inspector general, perhaps, a lot more scrutiny of this, a special committee to oversee this money, and an ability to sign off continually on these larger chunks of money rather than doing it all at once.
JEFFREY BROWN: You're hearing the same kinds of things? Is it Republican, as well as Democrat?
JOHN SHAW: Right. I think Republicans are so interesting to watch, because I've heard a number of them say, "This is so, so anathema to what all I've been saying all my career about what the role of the free enterprise system is, and how companies, you know, rise or fall on their own merits, and the government is there only as the last resort."
And so you've heard some very anguished commentary from congressional Republicans, particularly in the House, saying, "This really is different than what I've been talking about in my entire career."
Political theatre amid negotiations
JEFFREY BROWN: Let's come back to presidential politics here, because they came to town. You were on the Hill talking to congressmen. How did -- how did they see what John McCain and Barack Obama were doing today? What role -- how did that change the dynamic?
MARTIN KADY: Well, if you talked to Democrats, they saw McCain as just -- this is a stunt. He said, "I'm suspending my campaign. I'm flying back to Washington."
Well, we were standing out there waiting for the meeting where they were negotiating this deal, and McCain's motorcade pulled up outside, and he went into his office building, the Senate Russell Office Building. He didn't have anything to do with the negotiations. The deal was just about done, these fundamental principles that they've agreed to.
So McCain didn't have -- nor did Obama have any substantial impact on the actual content of the deal.
Do they think -- Republicans believe that McCain will bring a certain sense of leadership to this and he can maybe help -- if he gets behind it, then maybe more House Republicans especially that are resistant will get behind it.
But the presidential candidates being here is really just the political theater and not really the substance of the negotiations.
JEFFREY BROWN: We almost -- I mean, we heard Barney Frank earlier today almost sort of mocking that. He said, "We're going to go to a meeting to break a deadlock. Well, I'm happy to go to the White House, but there's no deadlock to be broken."
MARTIN KADY: Yes, yes, exactly. And, you know, it's not like Obama's involved in this, either.
I got a tip that Obama called into the meeting and talked to some of the folks while McCain was on his way over there. So they're each trying to find a way to insert themselves into the process without really messing it up.
But right now, we're at a very delicate point, and a lot of the negotiators who are actually writing the bill, that are doing the heavy lifting, are like, "Why do we have to have the presidential candidates here? We're very close."
JOHN SHAW: I was going to say, the most interesting briefing of the day was by Harry Reid without cameras, and he just lit into McCain. He says, We haven't seen him here in two years. He hasn't voted since April. He's not even an active member of the Senate at this point, so it's presumptuous and almost laughable that he's trying to position himself as being a broker in these negotiations.
JEFFREY BROWN: But there they are, and there we are in the midst of a campaign. So they must have some kind of role or everyone is aware of the role at the same time.
JOHN SHAW: And I think Martin makes a good point. I think there's a sense, too, that particularly with House Republicans, conservatives, that if McCain could walk in and say, "This is really important to do," that he might bring along some people who are not very eager to vote on this package right now, vote for it.
JEFFREY BROWN: You want to just venture -- we just have a minute or so here -- just a day or two ahead? I mean, where do -- we just got wire stories saying that -- Chris Dodd suggesting that this will be probably a couple of days. So there's no Friday deadline anymore.
MARTIN KADY: Well, this looks like it will go into the weekend. If they don't get it done by Sunday night, though, they've got a little bit of a scheduling problem, because the Jewish holiday begins Monday afternoon, Monday evening, so they would have to adjourn for a few days. So if they don't get it done Sunday, the markets will not like this. The markets will open badly on Monday.
JOHN SHAW: I agree. And I think, also, it will be very interesting. There will be some fighting, particularly on the Senate floor. I think some conservatives, Jim Bunning, Jim DeMint, will put up some procedural hurdles, and there will be an attempted filibuster, and there will be probably a long debate on this. So we could definitely drip over into next week, I think.
JEFFREY BROWN: Into next week?
JOHN SHAW: Yes.
JEFFREY BROWN: OK, John Shaw, Martin Kady, thank you both very much.
Financial mechanisms underlie plan
JEFFREY BROWN: Now we turn to some big financial questions underlying much of this political debate. Just how would this program work? Specifically, how would the government determine which assets it should buy and at what cost?
Vikas Bajaj has been looking into that for the New York Times, and he joins us from New York.
Well, Vikas, first, remind us what these assets are. And why is it so -- what is the issue in the government deciding which are the good ones and which are the bad ones?
VIKAS BAJAJ, New York Times: It's a good question, and Wall Street itself has not been able to figure that out. These assets are essentially securities that are backed by mortgages, oftentimes thousands of mortgages in backing one security.
And the concern, really, is how many of these loans are going to go bad, how many will end up in foreclosure, what will be the price that will be paid on these houses when they go to foreclosure auction?
And so a lot of the value of these securities depends upon your assumption for how bad things will get.
JEFFREY BROWN: So how difficult is it to value them, to put a price on them?
VIKAS BAJAJ: Well, you know, if you want to take Wall Street's quandary, I mean, part of the reason that we're here is because Wall Street itself is having a hard time valuing these.
The buyers who want to buy these things are often bidding at 20 cents, 40 cents on the dollar for these securities. And the sellers, being the investment banks or the commercial banks, they're often wanting 60 cents, 80 cents on the dollar for these securities.
And somewhere in between is probably a good price, but Wall Street itself can't find that price, because there's such a constrain on investment dollars and portfolios, nobody really has the capacity to take this on in sort of a big way.
JEFFREY BROWN: Well, explain a little bit more about -- because you hear about these loans that are packaged, and then repackaged, and then repackaged. And where's the beginning and where's the end, in terms of the complexity of deciding that, again, to the question of value?
VIKAS BAJAJ: Yes, it is truly complex. You know, we took one piece -- one security apart to try and sort of illustrate this problem, and it was about 3,000 loans in this one security. It had 36 bonds issued against it.
So if the government came in and wanted to buy the security, it would have to decide which of the 36 bonds it would want to buy and what price it would pay. Each of them has different characteristics.
Some of them get paid first; some of them get paid second, and so on and so forth. Some of them only get paid interest. Some of them get paid principal.
So that analysis oftentimes -- I mean, when we talk to Wall Street traders, they say that that could take days or weeks for them to complete analysis of, you know, what one is worth versus another.
JEFFREY BROWN: Now, the reason why this all matters, of course, is because it has real consequences. And this is, of course, part of the political debate here in Washington, the consequences of getting it wrong. First of all, if you overpay for these things, what are the consequences?
VIKAS BAJAJ: If you overpay, conceivably, you know, the taxpayer would foot some losses on these securities. You know, it really depends on where the Treasury decides to buy them at and what their true value will be down the road.
The argument is that the market price is not a fair price. That's what Treasury and Fed seem to be saying. There would be no reason for them to come in and buy, if they felt market price was good.
So they apparently feel that the market price is not the right price, that the inherent value of these securities is a lot higher.
JEFFREY BROWN: You mean, by definition, almost by definition, they're paying more than market price. The question is, how much more?
VIKAS BAJAJ: That's a good question. You know, Larry Summers was at a lunch earlier in the week, and this question was brought to him, and his answer was essentially that you'd come in -- it seems like they want to split the difference.
But not quite splitting the difference, because, you know, say a bank has these things on their books for 60 and the market price is 30, maybe Treasury offers 55. We really don't know, because it's quite unclear as to what mechanisms Treasury might use to price these securities.
Pricing, buying method unclear
JEFFREY BROWN: Well, that was my next question, the mechanism. Who actually does this? Who would do the pricing? How would that work?
VIKAS BAJAJ: I mean, if you wanted, there's a lot of mortgage traders, unemployed mortgage traders on Wall Street and you could hire a bunch of them to do this work for you.
You know, one of the things that they've suggested is that perhaps they would use a reverse auction. This is sort of an auction like you think of it in a conventional form, but just turned on its head.
So instead of buyers bidding for an asset, you would have one buyer and presumably many sellers offering to sell you that asset, and you would -- each of them would submit the bid at which they would love to sell this asset to you, and then there would be a mechanism, either the Treasury would decide, "Well, for this particular asset, we'll pay 50 cents," and, you know, so anybody who comes in at 50 or below will buy assets from them.
JEFFREY BROWN: And if something like this gets underway, how long does it take to know if it's working? In other words, you know, how long -- when do you know whether the government is setting the prices correctly?
VIKAS BAJAJ: I don't think you will know right away. I think you will, in fact, have to wait for a few years to know whether government set the prices right.
Because a lot of these foreclosures have to work themselves through the system, and that could take several months. And depending on the state, it can take even a year or two to get that done.
And so you might not know whether we've overpaid or paid the right price for a year or two.
JEFFREY BROWN: Now, what is your reporting telling you about how financial firms now are seeing all this or the prospects of this kind of a system, a plan?
VIKAS BAJAJ: I think there's a lot of a wait-and-see attitude on Wall Street. I mean, I think they're generally in favor of this. They think that this could be a benefit to the credit markets, which have been locked up essentially for the last few months and gotten worse in the last few days.
And I think they feel like, if it's set up in the right way, without too many pre-conditions, you know, things like executive pay and so forth that we've been talking about in Washington, if some of those things are not as complicated as they would like them to be, I think a lot of people would like to participate.
And this would perhaps give them a window into what prices may look like if these distressed conditions didn't exist.
JEFFREY BROWN: Is there -- I mean, again, just to go to what we were just talking about, with that fear out in the country that Wall Street may come out of this quite well. I mean, is there a sense in Wall Street that participating in a plan like this could prove to be profitable?
VIKAS BAJAJ: I think some people certainly feel that way. I mean, I think more than profit, I think they're trying to avoid losses on Wall Street right now.
I think they would like to see this behind them. They would like to see these assets behind them, because it is constraining their ability to raise new capital in the market.
And it's constraining their ability to run their businesses, because they have to take these -- they've been taking these write-downs quarter after quarter. They're really seeing sort of the confidence in them, in themselves really shrink to a very low level. And that makes it very hard for them to sell shares, to issue new bonds. It just kind of grinds the whole machinery to a halt.
So I think that to some degree, while, yes, they might think that this could be a profitable venture down the road, I think right now they're just feeling like we need to get out of the jam that we're in, rather than, you know, how do we make billions of dollars on this?
I think they might, but they need to get out of sort of the reverse gear before they can go in the forward gear.
JEFFREY BROWN: All right, Vikas Bajaj of the New York Times, thank you very much.
VIKAS BAJAJ: You're welcome.