The Bush administration has been trying to convince lawmakers and the American people for more than a week now that the effort to buy toxic mortgages from U.S. financial institutions is not about bailing out Wall Street — it is about the economy.

President Bush emerged from the Oval Office for the second day in a row in an effort to salvage the $700 billion financial rescue package that the House of Representatives narrowly defeated Monday. “If our nation continues on this course,” he warned, “the economic damage will be painful and lasting.”

The House rejected the legislation by a 228-205 vote, sending the Dow Jones industrial average into a nearly 800-point swoon. That was the index’s biggest point drop ever. President Bush, in his remarks Tuesday morning, sought to use Monday’s market debacle as an illustration of just what was at stake.

“Our economy is dependent on decisive action from the government,” he said. “The sooner we take action, the sooner we can get back on the path of economic growth.”

While some observers have balked at the rescue package’s $700 billion price tag, the president said that is just a fraction of what could be lost. “To put that in perspective,” the president said, “the drop in the stock market yesterday represented more than a trillion dollars in losses.”

The Dow recovered some of those losses on Tuesday. By late morning trading, the index was up about 300 points. White House officials are clearly hoping that Monday’s dizzying decline in the markets will focus minds. They are trying to nudge some lawmakers who voted “no” into the begrudging “yes” camp before the bill comes up again for a vote.

Compromises That Might Win More Support For Bailout

In the next 24 hours, lawmakers have a delicate dance to perform. They need to tinker at the edges of the legislation to win over reluctant Republicans without losing Democratic support in the process. Ninety-five Democrats and 133 Republicans voted against the bill.

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 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 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.

In a sign that lawmakers might have taken Monday’s market losses — and the president’s entreaties — to heart, Senate Majority Leader Harry Reid and Senate Minority Leader Mitch McConnell called for an end to partisan bickering Tuesday morning. “We will get the job done,” McConnell said assuredly. “We’ll get it done this week.”

Source: NPR