With No Plan B, House Passes Economic Rescue Plan

By Jonathan Weisman, David Cho and Paul Kane
Washington Post Staff Writers
Saturday, October 4, 2008; A01

Henry M. Paulson Jr. was in his corner office in the Treasury Department on Monday afternoon, too nervous to turn on his television, when his chief of staff poked his head into the Treasury secretary's office to tell him the stunning news playing out on Capitol Hill: The House had just defeated the Wall Street rescue plan that Paulson had helped craft.

Within minutes, Paulson was on his way across the street to the White House, his senior staff hustling to keep up, for a meeting in the Roosevelt Room with the administration's economic team. There was no time for pleasantries, and before everyone had taken their seats, the former Goldman Sachs chief began firing off options.

Should they push for an immediate vote in the Senate? Should the Democratic leaders be flashed a green light to put together a bill that they could pass on their own, without Republicans? Should they make small changes to win over the dozen or so votes they would need on a second try in the House?

Forty-five minutes into the meeting, they were joined by President Bush, who asked the one question no one had considered: If his plan is not working, what is Plan B?

Paulson looked at his boss, then delivered the answer he did not want to hear: There is no Plan B. The Treasury Department and the Federal Reserve had stretched their authorities to the limits, employing obscure powers never before used to keep their fingers in the dikes. The rescue package had to pass.

Yesterday, when the House reversed itself and approved the package by a 92-vote margin, there was little cause for celebration. Lawmakers had just taken one of the most painful and politically damaging votes of their lives. The stock market was sliding. Both presidential candidates had not only aligned themselves with an unpopular rescue plan and an unpopular president. They had actively worked for the bill's passage.

Many at Paulson's Treasury had already moved on to the next big news out of the financial markets: the sale of Wachovia Bank to Wells Fargo.

"There is no joy," said Rep. Sue Myrick (R-N.C.), a rock-ribbed conservative who switched her "no" vote to a "yes" yesterday, even though a Democratic surge in North Carolina is making her once-easy district look increasingly dicey. "I don't like the bill. I'm not going to defend the bill. . . . I had to do the right thing, even though, politically, it might kill me."

In some sense, the crisis atmosphere that has gripped Washington during its struggle to deal with the damage to world financial markets brought out the very worst in the city, precisely the chaotic, partisan atmosphere that voters seem so ready to punish next month at the polls. It also brought out political selflessness and courage, bipartisan cooperation and ultimately a triumph of sorts.

But as drama, it seemed to capture the vacuum caused by an administration in its last months, a bitterly contested presidential race and a Congress facing its own uncertain future at the polls. There were rebellions from left and right, and power struggles between committee leaders from the House and Senate. The sense that no one was in charge was accentuated by the scene on the other end of Pennsylvania Avenue, where Bush addressed the greatest financial crisis of his presidency with mostly brief and dour public comments.

Paulson worked himself to the brink of collapse trying to bring about a deal, but often seemed his own worst enemy, with a political tin ear that infuriated lawmakers and frustrated administration allies.

On the edges were the two presidential candidates, Sens. Barack Obama and John McCain, each following type -- Obama playing it cool and low-key, offering suggestions, working the phones, coming to Washington only when necessary; McCain going hot, suspending his campaign, bounding into the action as a self-assigned mediator above politics, then appearing lost in the disarray until embracing it, finding an unlikely role as an advocate of sorts for House conservatives who were feeling shut out.

But in the end, none of these people proved decisive. Instead, for Myrick, it was the Charlotte banker who told her the night before the vote about how the credit market in North Carolina was heading toward rigor mortis. It was the woman in Cleveland, Tenn., infant son in arms, who looked into Tennessee Republican Rep. Zach Wamp's eyes and said, "I appreciate you voting no, but please don't come home and leave things the way they are."

And it was Drew Greenblatt, president of Marlin Steel Wire Products in Maryland, who walked into Rep. Elijah E. Cummings's office Thursday to tell the Maryland Democrat's staff that his company had just landed a major contract for wire baskets, but when he went to the bank to get cash to meet the demands, he learned his credit line had been frozen.

"I decided late last night," Cummings said yesterday, just after he switched his vote. "I prayed on it, because this is a difficult situation. I needed to allow this moment in history to sink in."

'On the Brink of a Heart Attack'

It started to be a crisis a little more than two weeks ago, though for exhausted participants such as Paulson, it must seem like a lifetime. As congressional leaders assembled around the long wooden table in the office of House Speaker Nancy Pelosi (D-Calif.) shortly before 7 p.m. on Thursday, Sept. 18, many of them were thinking variations of the same lament: Here we go again.

They had been there before, sitting under a portrait of Abraham Lincoln, absorbing the latest dispiriting account of another major American financial institution going down the drain. But with every frightful word uttered now by Federal Reserve Chairman Ben S. Bernanke, the somber visage of Paulson at his side, it became apparent that this meeting was different, and worse.

In 10 minutes that shook Congress, if not the world, Bernanke laid out a scenario of financial dissolution so grave that for parts of it he swore his listeners to secrecy. The financial contagion, he said, had spread far beyond the securities companies of Wall Street to small businesses, the automobile sector and "any industry that depended on credit or loans."

These lines of credit served as arteries, Bernanke went on, employing a morbid metaphor to close his case. If they clogged completely, they would take down the system. The entire economy was "on the brink of a heart attack. We don't know when the heart attack will occur, but we know it will occur."

"I gulped," said Sen. Charles E. Schumer (D-N.Y.). "We all realized we're not in normal times."

Nearly a year ago, long before the collapse of Wall Street with the fall of Bear Stearns, Merrill Lynch and Lehman Brothers, Bernanke set up teams inside the Fed to prepare contingency plans, widespread interventions that they called "break the glass" options. The glass was now broken, he and Paulson agreed.

The problem was, lawmakers did not buy it, not on the left, not on the right. On a conference call the day after the meeting, Paulson and Bernanke spent half an hour with House Republicans, discussing in sketchy detail how the rescue plan would work.

The money men took only a handful of questions. Rep. Jeb Hensarling (Tex.), the leader of the most conservative Republicans, asked how they could expect lawmakers to approve such a major measure after only a few days of discussion. He asked why Paulson and Bernanke did not consider scrapping a technical accounting rule, known as mark-to-market, that many conservatives wanted to see eliminated, thinking it was a culprit in the financial crisis. We are way beyond accounting rules, Paulson responded.

After Paulson and Bernanke hung up from the call, Minority Leader John A. Boehner (R-Ohio) and Minority Whip Roy Blunt (R-Mo.) led the conversation for two more hours. Frustration and anger kept bubbling up from other ends of the line. Conservatives in the House felt they had no relationship with Paulson. He seemed to be much closer to Rep. Barney Frank (Mass.), the liberal Democrat who heads the House Financial Services Committee, than to any of them, they said. And he had already upset them several times during his tenure in his handling of Social Security and housing issues.

By Monday morning, Sept. 22, opposition was popping up all over the House. While Hensarling made a tactical decision not to avoid outright opposition so he would not be locked out of the negotiating process, Rep. Mike Pence (Ind.), his colleague in the Republican Study Committee, took that role, rallying colleagues against Paulson.

At a meeting of the group in the Rayburn House Office Building, only two of 40 lawmakers supported the Paulson plan. A rump caucus was also developing on the Democratic side, or at least a Skeptics' Caucus. That was the name organizer Rep. Brad Sherman (Calif.) gave the gathering that day at the Financial Services Committee room in the Rayburn building.

His session drew a dozen lawmakers, including arch-conservatives such as Rep. Louie Gohmert, a former judge from northeast Texas, and about 50 staff members. When the meeting adjourned, Sherman called the Paulson plan "the biggest power grab ever by the imperial presidency."

But to the congressional leadership, Paulson and Bernanke had given them little choice but to plow forward. Their message had been to act swiftly or face calamity. "Once they said it, then our options are limited," Frank said.

Tuesday marked the beginning of the administration's full-court press. It was not an overwhelming effort. At nine that morning, House Republicans gathered in the Cannon caucus room to hear from Vice President Cheney, reading from a prepared statement in a monotone voice. The meeting went horribly awry, according to several Republican lawmakers and aides. One called it among the five worst conference meetings Republicans have ever held.

No Arms Left to Twist

As the week drew to a close, Rep. John R. "Randy" Kuhl Jr. (R-N.Y.) printed out countless articles to educate himself on the financial mess. He read them wherever he could, at home or the office. With everything spinning wildly around him, he considered it "a challenge, to absorb all that information." His "Kuhl Chronicle," an internal newsletter in the district and Washington office, would list the number of e-mails and calls received from constituents. The previous week, there had been about 40. Now, as this week was nearing an end, the total was reaching 1,000.

He was sitting in the House cloakroom on Friday, Sept. 26, when Boehner walked in, bringing with him the stench of cigarettes. Boehner was a smoker, and he was smoking more now. Kuhl got up to talk to him, explaining his concerns and his growing opposition to the bill. He was not trying to foment rebellion, but he had his problems. He said he had been hearing from many angry constituents about the "total reliance on taxpayer dollars as a mechanism to allow this thing to happen."

The volume of his mail was getting his attention. And what he was hearing from financial people in his community was not quite aligning with the horrors Paulson and Bernanke expressed. In many cases, he said, business people back home were saying, "Look, this is not our problem. We are small community banks or credit unions who have been responsible lenders. We haven't gone the subprime-mortgage route. Don't charge me for the cost of bailing out the system of people who walked away with millions of dollars."

Little had changed by Monday, but with the Jewish New Year approaching, Paulson was demanding a vote. Blunt, the minority whip, said it should have been postponed, but he felt confident that he could round up the dozen or so votes he still needed on the floor.

As the vote clock ticked toward zero and the no's piled up, the market began to crash. "Just want you all to know the market is down 650 points," shouted Brian Gaston, Blunt's chief of staff, as he scoured the floor for votes. "It's dropped 450 points since this vote started."

House Majority Leader Steny H. Hoyer (D-Md.) and House Democratic Caucus Chairman Rahm Emanuel (Ill.) had leadership aides wave Blunt over. If the Republicans could deliver six vote switchers, they said, the Democrats could, too.

GOP leaders looked around for the half-dozen lawmakers who they thought would vote aye if it would make a difference. Aides e-mailed the chiefs of staff, asking where they were. One by one, the same message came back: "My boss is on the way to the airport."

The lawmakers Boehner and Blunt thought were the most loyal to them had voted and fled. There were no arms left to twist.

"The market's down more than 600 points -- 700, 800? What's it going to take?" screamed Rep. Joseph Crowley (D-N.Y.). Pelosi hushed him. He threw down his whip count papers and cursed.

Rep. Ellen O. Tauscher (D-Calif.) gaveled the vote shut and announced the bill's defeat. Frank had told the leadership that he did not want a long vote with lots of threats and cajoling, given the public's overwhelming opposition.

"It would have been a terrible mistake to put this through. It would have been scandalous," he said yesterday.

'Fear in People's Eyes'

That night, Senate Majority Leader Harry M. Reid (D-Nev.) met with his leadership amid rising concerns that House Democrats would try again, this time with a more liberal bill -- possibly with an extension of unemployment benefits, funding for infrastructure projects and long-sought bankruptcy rule changes -- that could win overwhelming Democratic support. That measure would almost certainly be filibustered in the Senate, he decided.

The next morning, Reid put it to Sens. Richard J. Durbin (D-Ill.), Christopher J. Dodd (D-Conn.), Kent Conrad (D-N.D.) and Max Baucus (D-Mont.): What if the Senate moves fast, with the basic rescue bill, coupled with a package of expiring business and energy tax breaks and another one-year patch for the alternative minimum tax? There were qualms, but Reid began working the phones, first calling Senate Minority Leader Mitch McConnell (R-Ky.), then Democratic leaders and White House Chief of Staff Joshua B. Bolten.

Shortly after 7 that night, to a near-empty Senate chamber, Reid and McConnell announced they would bring up the bailout-tax bill the next day. Such controversial moves almost always take unanimous consent, but nobody was there to object.

At Treasury and on K Street, the House defeat knocked home a central point -- the message that the rescue plan would help the economy writ large was not getting through. The Securities Industry and Financial Markets Association began a furious round of conference calls to rope in the American Bankers Association, the Mortgage Bankers Association and the Independent Community Bankers of America. The lobbyists agreed that lawmakers needed to hear from their constituents, not Wall Street or K Street. Auto dealers, AARP and manufacturers all joined in the effort.

It worked. Twice, the mayor of Chattanooga, Tenn., called Wamp, a "no" vote Monday, from Germany to tell him that Eastern Tennessee's triumphant win of a Volkswagen plant was at risk of collapse. Mark Vitner, an economist with the failing Wachovia Bank, told Myrick: "I have never seen fear in people's eyes that I see now, except when I was in the World Trade Center on 9/11."

Rep. K. Michael Conaway (R), a certified public accountant, headed home Monday to his West Texas district initially to back-slapping way-to-go's from constituents excited by his opposition.

But he spent the next day at Kermit High School, where even the students had some basic knowledge of what had happened in Washington. As Conaway explained the nature of the credit crunch to a class of seniors, a hand rose in the back of the room.

"Does this mean I can't get a college loan next year?" the student asked.

The next day, at a town hall meeting in Andrews, a city of 9,800 people 35 miles north of Midland, Tex., Conaway said a somberness fell over those gathered as they came to grips with the potential for the financial crisis to affect them.

Two men who are not from the districts were also making calls. On Wednesday evening, as he walked through the Capitol, a strange phone number with too many digits rang on Cummings's cellphone. When he answered, the voice announced, "Hello, congressman, this is Barack Obama."

To African American and liberal lawmakers, Obama's message was reassuring: All the measures that Democrats were not getting now, such as infrastructure spending and bankruptcy rule changes that would allow judges to adjust mortgage repayments, would happen in an Obama administration.

In a conference call Thursday that Rep. Betty Sutton (D-Ohio) organized, half a dozen or so freshman Democrats received Obama's assurance that his Treasury secretary would do everything possible to recoup the money now going to buy troubled assets from ailing banks.

By that night, the White House was increasingly certain the bill would pass. But lawmakers insist they were not at all so sure. Myrick said she made her decision to switch yesterday morning. Cummings said he prayed on it, then decided late Thursday night.

Returning to Washington on Thursday, Conaway was still undecided. He went to bed that night, reading 2 Chronicles 1:10 -- "Give me now wisdom and knowledge, that I may go out and come in before this people, for who can rule this great people of yours?" -- and asking God for strength.

"I got up this morning at peace with what I was going to do," he said.

He voted yes.

Staff writers Michael Abramowitz, Zachary A. Goldfarb, Neil Irwin and David Maraniss contributed to this report.

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