Paulson May Find Turmoil Helps Renew Push for Bailout (Update1)

Sept. 30 (Bloomberg) — Treasury Secretary Henry Paulson may have to rely more on the worst stock market plunge in two decades and a deepening credit-market freeze than personal persuasion to sell his bank bailout plan to Congress.

Paulson pledged to work with lawmakers after the House of Representatives yesterday rejected a $700 billion rescue, sparking the biggest collapse in the Standard & Poor’s 500 Index since the October 1987 crash. As Congress considers returning in the next two days to reexamine the proposed legislation, lawmakers are weighing the implications of inaction.

“The impact this can have on the markets will have a big impact in getting people back to wanting to work together and get this problem solved,” Representative Roy Blunt, the House Republican Whip, told reporters after the vote.

The vote wrapped up an almost two-week odyssey for Paulson during which he insisted Congress would be making a “grave mistake” to curtail or delay the legislation. Now that the market drop is showing lawmakers that some of Paulson’s worst predictions are coming true, the Treasury secretary will get another chance to push through his proposals.

The market drop yesterday wiped $1.2 trillion from the value of U.S. stocks — almost double the borrowing authority Paulson is requesting from lawmakers. The S&P 500 fell 8.8 percent to 1106.42 points, the lowest level since October 2004. Futures on the index rose 2.3 percent today.

Yesterday’s decline “has really put a punctuation mark on how much risk there is right now and how much concern there is right now and how important it is that we take action,” New Hampshire Senator Judd Gregg, the lead negotiator for Senate Republicans, told reporters yesterday.

Bush Statement

President George W. Bush said in a White House address today that “we are in an urgent situation and the consequences will grow worse each day if we do not act.” His lack of political clout was underscored in yesterday’s vote, when two thirds of House Republicans voted against the measure.

Paulson will continue to be the lead figure in arguing the administration’s case, although his public salesmanship drew fire from Republicans and Democrats alike. He gets get poor marks from some lawmakers and outside experts for allowing the plan to be perceived by the public as a bailout for Wall Street firms.

“Paulson is not a very persuasive speaker,” said Peter Wallison, a resident fellow at the Washington-based American Enterprise Institute and former Treasury official. “He should have spoken about this from the beginning as something much closer to an investment in our future.”

Stressed Markets

As Paulson renews his push for a deal, he will have to persuade lawmakers of the economic consequences for Americans should the bill fail. Yesterday he restarted that effort by highlighting the impact on average households, saying they will see car and student loans dry up.

“Markets around the world are under stress, and that reduces the availability of credit that businesses across America use to meet payroll and to purchase inventories,” Paulson said outside the White House. “Families, too, feel the credit crunch as it becomes more difficult to get car loans or student loans.”

U.S. House Majority Leader Steny Hoyer said lawmakers, who were due to return to their home states last weekend, will “continue to work around the clock” to break the logjam and the Senate may take up legislation on Oct. 2. Senator Mitch McConnell, the Republican leader, said “no action is not an answer.”

Asian and European stocks dropped today, extending the worst global sell-off in 21 years.

Market Pressure

“Come Thursday, when the package is presented again to the U.S. House, many of the same people who voted against it earlier today will change their minds because of the pressure coming from the markets,” said Stephen Roach, chairman of Morgan Stanley Asia Ltd. at a seminar in Hong Kong.

While Congress deliberates, the administration may need to make more use of its “substantial but insufficient toolkit,” Paulson said. One option might be making more use of the Federal Deposit Insurance Corp. to backstop banks and the financial system, according to an idea pitched to lawmakers by former FDIC chairman William Isaac.

“The FDIC is the source of the greatest amount of expertise on dealing with distressed financial institutions assets anywhere,” said Joseph Mason, a professor at Louisiana State University in Baton Rouge who used to work at the Treasury’s Office of the Comptroller of the Currency.

Election

Proponents of this plan say the FDIC already has the authority to place its backing behind all of the creditors of the banking system, and has done so in the past. Chairman Sheila Bair could issue a statement saying the FDIC is prepared to do this on an institution-by-institution basis.

Yesterday’s sell-off reverberated to Colorado and Iowa, where the two presidential candidates were angling for votes. Barack Obama called for calm, saying a bailout “will get done.” Republican John McCain urged lawmakers to “go back to the drawing board” and come up with legislation that will pass.

The past 10 days of talks between the White House and Capitol Hill are testing the limits of Paulson’s endurance to work weekends and nights, which staffers have characterized as relentless. The marathon may be starting to take its toll.

During a negotiating session that extended into the evening on Sept. 28 at the Capitol, Paulson at one point leaned back in his chair and closed his eyes, sparking worries that he might need a doctor. According to a person familiar with the deliberations, it wasn’t a health crisis, just fatigue.

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