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Six Paths to (Possible) Bailout Success

By Matt Cooper

As the corpse of the bailout bill lies at the feet of the House of Representatives, everyone--Republicans and Democrats on the Hill, the Bush administration, presidential campaigns--has expressed a determination to go back to the drawing board. There's one catch: no one agrees on the fundamentals.

Treasury has been wedded to a plan that's built around the federal government buying distressed assets from beleaguered financial institutions. But that is precisely what two-thirds of House Republicans oppose and why on Monday they voted against the bailout package that their president went on national television to sell, that their nominee suspended his presidential campaign to promote, and than even their top renegade leaders came to support.

Unless the financial situation becomes incredibly dire (yes, more dire than European bank bailouts, forced financial mergers in the U.S. and general carnage in the stock markets) in the coming days, it's hard to see those House Republicans reversing their votes.

Against that backdrop, the options are few:

MCCAIN COMES BACK AND WRITES HIS OWN PLAN. John McCain is on record as suspending his campaign because of this crisis. He only unsuspended it--officially anyway--when the crisis seemed to be passing. Now that things have become untethered, isn't it his responsibility to resuspend his campaign and come back to Washington and lead his party to a bill it can support? Obviously, his last trumpet blow fell on deaf ears. Now he needs to come back and take the bull by the horns, Teddy Roosevelt style.

THE FED GOES SOLO. Basically, the Fed can do a lot of the Treasury plan on its own through the discount window. It can trade Treasuries for crappy assets. It's got a limitied amount of money, and it would have to open the window to the likes of mortgage brokers, but it could do some of it independently.

PAULSON REDUX. Another scenario is that the market tanks, enough leaders recant their no votes, and they basically back some version of Paulson's original plan. Unlikely? Yes. Impossible? You never know.

LET BOEHNER WRITE IT. The House Republicans may be trying to blame House Speaker Nancy Pelosi for the measure's defeat. But the botttom line is that 60 percent of House Democrats supported this mostly Bush Administration plan while two-thirds of Republicans balked. The best bet now is for the House Republicans to write a proposal built around their insurance idea.

If it works, great. If not, we'll come back and do this again. But there's no way to repackage the basic Paulson plan and sell it again--unless the market continues to tank and the Republicans cry uncle. Today's near 8 percent drop--that's 777 points if you're keeping score at home--in the Dow didn't seem to weaken their resolve. Maybe a couple of thousand points more will.

BACK TO AD HOC BAILOUTS. Assuming there's no massive credit freeze, the Fed and Treasury could continue along with bailouts as they did with Bear Stearns and A.I.G. It's not an ideal solution but it's basically what we've been doing and it could continue. It seems less likely now that there aren't these things called investment banks anymore.

MCCAIN-OBAMA. They work out a plan together. They sell it to members of both their parties. It seems impossible. After all, they both endorsed the last plan and no one bought it. But maybe the fear of God and the direct imprimatur of the candidates will get them over the finish line.

Matt Cooper

Related Links
Let Boehner Write It, or Have the Fed Go Solo
America's Ad Hoc Fiscal and Monetary Policy
Incentives for Inflation

Full post as published by Portfolio.com: Capital on September 29, 2008 (boomark / email).