After watching more than a trillion dollars in market value evaporate on Monday, Wall Street roared back on Tuesday.
The day seemed choreographed to inspire market confidence. President Bush, for the second day in a row, came out to assure anyone within earshot that a rescue plan would be passed in short order.
A short time later, the minority and majority leaders of the Senate stood before the microphones to say that the time for partisan bickering had ended.
Wall Street investors saw all this as encouraging. The markets rocketed right out of the blocks — up nearly 300 points in early trading. The Dow Jones industrial index ended the day up 485.21 points higher, at 10,850.66.
The Senate is scheduled to vote Wednesday night on a revised bailout measure that reportedly includes provisions such as an increase in the limit on federally insured bank deposits to $250,000 from $100,000, and changes to the alternative minimum tax.
All Eyes On Congress
What lawmakers manage to get done over the next 24 hours will be key. They will have to strike a delicate balance between changing the $700 billion bill just enough to pick up more Republican votes and not losing Democratic support in the process.
Ninety-five Democrats and 133 Republicans voted against the bill on Monday. Lawmakers need about a dozen more votes to get the bill — in whatever form it eventually takes — passed in the House.
House members reconvene on Thursday. Congressional leaders have said they hope to get something passed by the end of the week.
"If our nation continues on this course, the economic damage will be painful and lasting," President Bush said before the markets opened on Tuesday. He said Monday's market declines were proof of just how much was really at stake.
"Our economy is dependent on decisive action from the government," the president said. "The sooner we take action, the sooner we can get back on the path of economic growth."
Voters have made clear that they don't like the idea of using $700 billion of taxpayer money to bail out rich executives on Wall Street. The White House has been trying to convince both lawmakers and the American people that this isn't a bailout, it is a rescue.
President Bush said the current rescue package's $700 billion price tag is just a fraction of what could be lost if the plan doesn't go ahead. "To put that in perspective," the president said, "the drop in the stock market yesterday represented more than a trillion dollars in losses."
Compromises That Might Win More Support For Bailout
The horse trading on Capitol Hill has already started.
Conservative Republican members of the House want some sort of mandatory insurance program to be included in the bill. They have also asked for the Securities and Exchange Commission to suspend mark-to-market accounting rules and instead require bank regulators to assess the real value of troubled assets.
Mark-to-market accounting essentially allows Wall Street firms to value (or "mark") the assets in their portfolio based on current market prices. The problem, critics say, is that under that accounting rule, sliding home prices affect not just the value of mortgages that are defaulting but of all mortgages — and therefore, of all mortgage-backed securities.
That, in turn, affects how much capital firms are required to have on hand to cover their debt exposure. And to raise that capital, firms end up having to sell other assets — which drives the price of those assets down, too. In other words, they say, mark-to-market accounting can lead to a downward spiral.
Democrats have been opposed to both a change in mark-to-market accounting rules and to the insurance provision.
House Republicans are also lobbying the White House to get the Federal Deposit Insurance Corp. to step up and issue lenders certificates that they could use as capital. They would essentially be loans that the banks would have to pay back with interest. In return, the FDIC would get more power to say how the banks ought to be run. Democrats aren't enthusiastic about that proposal, either.
Fence-sitting Democrats have asked that bankruptcy judges be allowed to step into the mire and alter home mortgages for homeowners in bankruptcy. They'd like the judges to be able to tinker with the terms of the loan and maybe even write down the principal balance. Republicans have said such a provision would be a poison pill that would kill their support for the legislation.
Michael Andel, chief of staff for Democratic Rep. David Scott of Georgia, said he believed a deal was possible by late this week if congressional leaders agree to a few modest additions to the bailout bill. Andel said a direct home-loan program in the package would get many new members on board. "A little more help for average folks would go a long way," he said.
Scott was circulating a proposal on Tuesday to use 1 percent of the bailout funds to directly buy mortgages from troubled homeowners.