The Bailout: Senate Is Next

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The shift increased the pressure to come up with a workable new solution, fast. And throughout the day there was growing talk that increasing FDIC insurance on individual bank accounts from the current level of $100,000 to $250,000—at least for one year—might go a long way toward roping in Republican votes. House Republicans had proposed a bump-up in FDIC insurance early in last week's negotiations, but the idea had gained little traction.

Candidates Like Higher Cap

On Tuesday morning, however, Obama endorsed the idea, and his Republican rival did so hours later on CNN. And though House Republicans displayed little sign of narrowing their deep divisions over what to do next, Minority Leader John Boehner (R-Ohio) released a statement saying "the Presidential candidates' support for increasing the FDIC cap is welcome news."

Such a change (BusinessWeek.com, 9/30/09) will help win over moderate Republicans, argues Daniel Clifton, the head of the Washington office of Strategas Research Partners, an investment advisory firm. The thought was seconded by one high-ranking Democratic aide. Republicans needed "to figure out something that appeals to the populists" complaining about the package, he says. That wouldn't have been likely to happen by adding a reduction in capital-gains taxes, as some Republicans have called for.

"I don't know if increasing FDIC insurance would be enough, but it's something that small banks have always wanted," the Democratic aide adds. Small businesses might be happy to see such a move as well, as would many individuals now worried about how safe their money is. That could help calm fears that more bank runs are ahead if more institutions fail.

FDIC in Favor

By Tuesday afternoon, the idea seemed to be gaining more traction, as Sheila Bair, the head of the FDIC, came out in support. "To address this crisis of confidence, I do believe that it would be helpful for the FDIC to have the temporary ability to raise deposit insurance limits," Bair said in an e-mail to the trade publication American Banker. "This would provide the dual benefits of providing additional liquidity to banks for lending as well as provide some additional reassurance to depositors above the current limits."

Prospects for the bill's passage with only the addition of the FDIC insurance and the tax breaks were also helped by a move earlier in the day by the SEC to clarify the rules on an accounting rule known as "mark-to-market." Some Republicans, and a few Democrats, have called for the legislative package to include a suspension of "mark-to-market" accounting for troubled financial companies. As prices for mortgage-related assets have tumbled—and prices are hard to come by at all for some securities—companies face having to lower the assets' values on their balance sheets. That can mean potentially painful consequences, as they are forced to raise more capital in a market in which few investors are willing to step up.

Financial-services firms have lobbied heavily for such a change to be included in the bill, arguing that market values in such circumstances don't reflect the assets' "true" values, and that companies should be allowed to use other figures instead. Opponents argue the move would only mislead investors, further undermining trust in the underlying health of financial companies.

SEC Issues Guidance

On Tuesday afternoon, the Securities & Exchange Commission and accounting rule makers issued guidance emphasizing the role of judgment in valuing these assets when market prices aren't readily available. Although the guidance didn't break new ground, accounting experts say it could be interpreted as giving companies more flexibility, reassuring them that they can be more lenient in marking down troubled assets—using discounted cash flows to estimate a current value, for example, on the belief that they are fundamentally sound and that pricing is likely to recover. Financial-services lobbyists were clearly happy with the shift.

"That's exactly what we have been arguing for," says Talbott. "If no one wants to buy an asset, there's no market for it. But if people are still paying off their mortgages, they have real economic value" that is not reflected by current mark-to-market values.

The SEC's move gave the recalcitrant Republicans one more item that they had fought to get included in the bill, helping clear the way for the more limited changes that the Senate will vote on Wednesday night. Will it be enough? Congressional leaders appeared confident it will be, but we've all been here before.

With Theo Francis.
Sasseen is BusinessWeek's Washington bureau chief.