U.S. Weighs Increase in Deposit Insurance

WASHINGTON -- Congress and the Bush administration are hashing out an agreement to raise the level of consumers' bank deposits guaranteed by the government, an idea they hope might bring enough support to revive President George W. Bush's planned rescue of financial markets.

Bush: Financial Security Is at Stake

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President Bush argues the need for quick congressional action on a rescue plan. If action is not taken, he says, the "economic damage will be painful and lasting." Video courtesy of Fox News. (Sept. 30)

The Senate will vote on a new version of the rescue bill Wednesday if a compromise can be reached on this and other issues. Congressional leaders expect the vote could build momentum for passage of the bill in the House, which stunned Washington Monday by rejecting the $700 billion banking-rescue package.

Congressional leaders were also considering changing an accounting rule known as "mark to market" that some lawmakers blame for the financial system's volatility. The legislation would back up the Securities and Exchange Commission, which Tuesday gave companies more leeway to figure out the value of assets for which there are no buyers. Other possible additions: jobless benefits and homeowner tax breaks.

The move to boost deposit-insurance limits, which the White House has raised with industry players, received a boost Tuesday when presidential candidates Sens. John McCain and Barack Obama endorsed the idea. Both candidates planned to return to Washington Wednesday for the possible Senate vote. Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., which oversees the program, said she would support temporarily raising the coverage.

"I'm willing to do this given the exigencies we're looking at," said Sen. Christopher Dodd, a Connecticut Democrat and chairman of the Senate Banking Committee. "This is a matter I normally want to give a lot more consideration to than 24 hours." Mr. Dodd said the Senate would vote on raising the FDIC limit to $250,000 from $100,000 for one year. Final details were still being worked out and could change.

These seemingly minor moves are part of an effort by White House and congressional leaders to rescue the president's proposal by giving it a running start in the Senate. Mr. Bush has said the plan is vital to ensure the proper functioning of the financial system. The proposal was defeated Monday in a stunning revolt by rank-and-file lawmakers, sending global stock markets reeling.

It's not clear if the measures will be enough to reverse Monday's defeat, although initial indications suggest they will attract lawmakers to the legislation. The moves wouldn't fundamentally change Treasury's proposal to buy troubled assets, but would add a populist tinge at a time when voters appear enraged at what many see as a bailout of Wall Street, not Main Street.

Federal law generally insures depositors up to $100,000 when banks fail. The limit hasn't been increased in more than two decades. Proponents of raising the limit say runs on deposits, fueled by consumer fears about the economy, have contributed to recent financial turmoil, and played a part in the collapse of IndyMac and Washington Mutual Inc. They say higher limits will restore confidence in the banking system by comforting consumers who might otherwise take their money out.

Sheila Bair

Building Support

Congressional aides said a new proposal could build support among centrist Democrats and Republicans by addressing concerns that the Bush-backed bill needs more protections for Main Street.

Such a measure would also win the backing of community bankers, who have lobbied heavily on its behalf. The U.S. government recently began insuring money-market mutual funds temporarily. Bankers argue that takes away one of their advantages over those funds, which offer better yields than bank deposit accounts. The community banking industry is a powerful force behind the scenes in Congress and its clout could sway some lawmakers to support the bill.

The Dow Jones Industrial Average, buoyed by general comments from lawmakers suggesting a new deal could be reached this week, rebounded Tuesday after Monday's record 777-point plunge. The blue-chip measure soared 485.21 points higher, or 4.7%, to close at 10850.66, off 4.4% for the quarter. The new proposals also came as Ireland moved to buttress its banking system, and three European nations bailed out another major lender this week.

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Adding to the pressure on Congress to act were some of the nation's biggest corporations, including Verizon Communications Inc., Microsoft Corp. and General Electric Co. GE Chief Executive Jeffrey Immelt is actively lobbying politicians and finance officials in Washington to complete the financial-rescue bill, said a company spokesman. To back up his message, Mr. Immelt directed his staff to compile evidence of the "negative ripple effects" throughout America from the crisis on Wall Street, including information on what is happening to customers and employees in all 50 states.

The unexpected failure of the $700 billion bill in the House exposed deep skepticism in both parties with the planned rescue and sparked a bitter round of finger-pointing over which party was to blame for the collapse.

In the aftermath Tuesday, the nation's political leadership at both ends of Pennsylvania Avenue offered renewed pledges of cooperation. At the White House, Mr. Bush vowed to "work closely with leaders of both parties," a commitment echoed by Speaker Nancy Pelosi (D., Calif.) and Senate Majority Leader Harry Reid (D., Nev.)

Congressional leaders are focusing on improving the bill that failed Monday in hopes of enticing enough lawmakers to change their votes -- 12 would need to switch, assuming all other votes stayed the same. In a series of private discussions Tuesday, the biggest focus was adding an amendment that would raise deposit-insurance limits for banks.

It's not clear why the idea of raising deposit insurance was left out of the original bill that failed. Republicans say they pushed it, only to be rejected. Democrats counter that it wasn't floated during the last round of negotiations over the weekend.

One problem: Raising the deposit-insurance limits could require that the FDIC levy higher fees to fund the program, which might have to come from the struggling banking industry. An alternative would be to temporarily waive the premiums that banks pay to the FDIC and have the Treasury be liable for covering losses.

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The FDIC's deposit-insurance fund is already at a historically low level, with roughly $1 backing every $100 of insured deposits. One concern among several government officials skeptical of the idea is that it could be politically impossible to reduce the insurance ceiling after the crisis subsides.

The FDIC insured roughly $4.5 trillion in deposits as of the second quarter, and had $45 billion in the actual fund.

In supporting the move, the FDIC's Ms. Bair said it "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." She raised the idea of "potential borrowings from Treasury" to set up such a program, which would eventually be paid back through fees charged to the banking industry.

In the days after Hurricane Katrina, small banks along the Gulf Coast endured deposit runs, prompting calls by bankers in the region for a temporary increase in deposit-insurance limits. Depositor fears subsided, and the bankers backed off of their request. Amid the current market turmoil, similar runs have created problems for regulators and bank managers.

Harry Reid

"What we're seeing, in general terms, is almost irrational behavior on behalf of some consumers who are panicking," said Scott Polakoff, the senior deputy director at the Office of Thrift Supervision, which regulates savings and loans.

Building Consensus

The House and Senate, in observance of the Jewish New Year, did not meet Tuesday for formal business. With Capitol Hill largely emptied, senior lawmakers and their staff found much-needed breathing room to begin discussions of how best to build consensus for Mr. Bush's plan. That plan envisions spending $700 billion to buy up the tainted mortgages, securities and financial assets that are undermining market confidence and threatening to tilt the U.S. into recession.

Congressional leaders have other options, in addition to the FDIC concept. Among Democrats, for example, there was interest in adding new assistance for unemployed workers, as well as a new $1,000 tax deduction for homeowners who don't itemize deductions, a move that could help address concerns the original bill wasn't focused on helping "average Americans."

Nancy Pelosi

Late Tuesday, the Senate leadership signaled its intention to fold into the market-rescue bill a package of business and individual tax proposals, including a measure to ease the bite of the so-called alternative minimum tax on middle-class families. House Minority Leader John Boehner (R., Ohio) "gave the green light" to the idea, believing the tax package will appeal to House Republicans, a Boehner spokesman said. But the move carries risks, since such tax proposals have been unpopular among moderate Democrats in the House.

'Reason to Vote'

Rep. Steve Cohen (D., Tenn.), who voted for the original bill, said adding a deposit-insurance increase might help pick up some conservative Democrats and Republicans. "I think you're going to find Republicans looking for a reason to vote for something that is a little bit different," he said.

Camden Fine, chief executive officer of the Independent Community Bankers of America, a trade group representing local banks, noted that the federal government bailed out two major banks -- Wachovia Corp. and Washington Mutual -- moves that effectively protected all funds held by depositors. That worries smaller banks, that fear consumers may leave them for larger institutions. Thirteen banks have failed this year, the most since the end of the savings-and-loan crisis in the 1990s.

On the question of the SEC's mark-to-market accounting rule, the agency issued guidance Tuesday that could give management more flexibility in valuing securities when there isn't a regular market for them.

Over the past year, some financial firms have had to write down the value of assets; under the accounting rule, if there is no active market, an asset's value would have to be cut substantially, even if it might be worth something in the future. That has eroded firms' capital base, making them more vulnerable to downturns in the market and reducing confidence among investors.

The SEC said on Tuesday that in some circumstances it might make more sense to judge assets not on what the market will bear, but on their intrinsic value -- for example, if they're from a highly respected company that is unlikely to default.

The move is less expansive than that desired by some business groups, which wanted the rule suspended altogether. But its implications are nonetheless significant, potentially giving financial firms a way to revive the value of assets that were previously considered worthless. Critics have charged that such a move would paper over problems and make opaque markets even harder to judge.

House Democrats who voted against the bill received thousands of calls yesterday from constituents. Most members' staffs said the callers agreed with them. Rep. Tom Udall of New Mexico, a five-term Democrat, received 831 emails in the 24 hours after the vote, as well as 300 calls to his New Mexico offices and 100 calls in D.C. "Both calls and emails are two-thirds to 75% opposed to the bailout bill as it stood yesterday," said Mr. Udall's spokesman Sam Simon.

White House spokesman Tony Fratto declined to discuss specifics, but suggested the president is flexible.

"There's no single silver bullet here," he said. "There are lots of good ideas that can help the financial-services industry and our financial markets, and we're going to look at all of those ideas."