Reports Jay Newton-Small. She continues:

I'm told the bill will likely pass the Senate even though it will have to garner 60 votes, which means the hurdle remains the House.

I'm still waiting to hear if the ‘Emergency Economic Stabilization Act of 2008,' is identical to the bill the House failed to pass Monday. But, I'm told that with Chris Cox's mark-to-market changes today, the addition of the FDIC ceiling increase and the popular $13 billion tax extenders, the bill should win enough GOP votes to pass the House. “We think will have substantial appeal to House Republicans,” said one GOP House leadership aide. “Boehner was consulted and gave the green light.”

Update: Now Jay has a story up about changing sentiment on the Hill:

Most members explained their votes opposing the bill Monday as a reflection of their constituents' anger about a rescue package for Wall Street. "Since the vote, it's about half and half," Representative Tim Murphy, a Pennsylvania Republican who voted against the bill, says of the calls coming into his office. "Half say, Do something — I'm worried about my business or my retirement; and the other half still say, Don't vote for the bailout."

The Securities and Exchange Commission and the Financial Accounting Standards Board declared Tuesday that in some situations you sorta don't have to mark the value of the securities you hold to their market values if you really don't feel like it, while many Republicans in Washington are pushing for an even more sweeping suspension of mark-to-market accounting. I'll weigh in on the topic later, but for the moment I'll give the floor to Curious Capitalist Senior Accounting Theory (and Professional Golf Management) Correspondent Paul B.W. Miller:

Here are my basic points: reports that are truthful are more useful than those that are not; reports based on assumptions and predictions are not as reliable as reports based on observations; mark-to-market reports are based on observations; other methods of accounting are based on assumptions or untimely measures of investments (e.g., cost); ergo, MTM accounting is superior to other forms.

I had suggested to Paul that while mark-to-market made sense for financial reporting purposes, it might be prudent for banking regulators to ignore it in time like these. His take:

As to your bifurcation into regulatory and nonregulatory applications, why would you prefer that regulatory reporting be based on something that we (and the capital markets) know is NOT true? Why would you want to use something like “economic value” (present value of management's predictions discounted at management's rate) instead of market value (observed consensus valuation of lots of buyers and sellers with no predictions or assumptions). The consequence of moving away from the truth is a movement toward a public policy of deceptive reporting as a good thing. This policy is doomed to fail.

Which is exactly how we got into this mess — managers were lulled into investing in very risky (volatile) instruments, in part because the accounting did not reveal their riskiness. Going with mark-not-to-market is an endorsement of not holding managers accountable for their decisions and outcomes. Indeed, it's organized imaginary accounting. No one believes it except the managers, and no one is calling for bad accounting except managers and Congress. Where is the CFAI on this issue? [Editor's note: They're here.]

The apparent objection to MTM is that it reveals what management (a) doesn't want anyone to know, namely that their investments are risky and volatile, and (b) doesn't want to confront, namely that they didn't do their homework and ended up believing others who said that mortgage-backed securities are as safe and sound as CDs. They messed up and they don't want us to know it and they don't want to have to fix it. They would rather live in an imaginary world where all income streams are placid and constant.

With regard to capital requirements — wow, that's where the whole problem lies. They are so over-leveraged with short term debt and over-extended with long-term assets that their real equity is incredibly volatile. If we want safe and secure financial institutions (as a matter of public policy), which option makes more sense? A) Report the real volatility, thereby driving managers to take steps to avoid risky investments or to actually mitigate risk through valid hedging strategies; or, B) Present them with accounting rules that hide the volatility and produce results that suggest there is no risk.

I vote for A) every time.

One more time: messing with the accounting to produce artificially smooth and safe results is a public policy based on deception.

And — don't forget this point: just because the financial statements project an image that everything is smooth and placid and riskless doesn't mean the capital markets will accept that image. There is no law in the land that can make investors believe and act on manipulated statements, and there is no law in the land that can prevent them from seeking out other information by other means to try to uncover reality. The obvious public policy is to promote full and timely disclosure of that which is known and desired by the markets so that inefficiency and deception are squeezed out. The consequence is less uncertainty, lower risk, and lower capital costs, with higher values for both bonds and stock. Simple economic logic.

Lifted from the comments to my post on the media's failure to explain what's at stake here, a most excellent explanation of the credit crisis by Sean DeCoursey forgot his password (hey, that's what he calls himself; I'm not gonna risk insulting him by just calling him Sean DeCoursey):

The simplest (and this is simplifying a lot) explanation:

Bob took out a mortgage for $1000 from Steve on which he agreed to pay back $2000 over the next 30 years. Steve split that $2000 into five packages of $400 and sold them to Jack for $300 each.* Jack has bough dozens of these little $400 packages. He combines 10 of them from 10 different people into a $4000 security that pays interest. Which he then sells to Jim for $3500.**

Jim says hey, I'm an institutional investor and I got a diversified security that pays steady returns over a 30 year term and is backed by real estate value. Yay me for safe investing! It's even rated AAA by the bond agencies.***

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I just got around to reading Glenn Greenwald's much-discussed post from Monday about how the Bailout follows the 10 normal principles for how our government functions. I agree with a couple of his points (that the concessions Treasury made to Congressional leaders in drafting the bill were mostly a joke; that a lot of economists don't think Treasury's approach is the best), but it's also a great example of how everybody sees the world through a lens distorted by their priorities and experiences.

Greenwald sees this financial crisis, and the government's reaction to it, through a lens distorted (or polished, if you prefer) by his obsession with the Bush Administration's past mendacity and power grabbing. So what Paulson is doing is pretty much by definition an unjustified putsch.

I tend to see Paulson's actions through a lens distorted (or polished) by my knowledge of past financial crises. Most of the ones I know about (the Great Depression of the 1930s, the Asian financial crisis of the late 1990s, the Scandinavian financial crisis of the early 1990s--and let's not forget the near-panic of 1914) were eventually resolved by governments temporarily assuming extraordinary powers over the financial system and the economy as a whole. So while I have a lot of doubts about the particular approach chosen by Treasury, the idea that taxpayers are going to need to pony up a lot of money and give Treasury some leeway in deciding how to use it doesn't seem crazy to me at all.

Yves Smith calls it Mussolini-style Corporatism in Action. But you could just as well call it FDR-style corporatism or Carl-Bildt-style corporatism.

Update: Some related commentary (that I agree with) from Kevin Drum. (Via The Klein Who is Better at Chinese Cookery):

Paulson now works for the United States Treasury, but his instincts are the same as always: even if for no other reason than to boost his own ego, he's going to want to drive the hardest bargains possible — and the weaker the opponent, the harder he'll push.

Don't believe it? Take a look at the Fed/Treasury actions so far. Was the Bear Stearns rescue a sweetheart deal? No. In fact, the original $2 per share terms were so onerous that JP Morgan, which bought Bear, eventually raised the offer voluntarily. And what about Lehman Brothers? Would a Wall Street crony have let Lehman fail? Nope. The next day AIG was rescued, but read this and tell me if you think AIG got any kind of break in return for its $85 billion loan. They didn't. AIG got hammered.

Okay, so journalists (and Treasury and the Fed officials) have been unhelpfully vague in trying to describe the bad things that could happen if we don't do something dramatic to pump money into the financial system. LSE economist and FT blogger Willem Buiter is not so vague:

The US stock market tanks. Bank shares collapse, as do the valuations of all highly leveraged financial institutions. Weaker versions of this occur in Europe, in Japan and in the emerging markets.

CDS spreads for banks explode, as will those of all highly leveraged financial institutions. Credits spreads generally take on loan-shark proportions, even for reputable borrowers. Again the rest of the world will experience a slightly milder version of this.

No US bank will lend to any other US bank or any other highly leveraged institution. The same will happen elsewhere. Remaining sources of external finance for banks, other than the facilities created by the central banks and the Treasuries, will dry up.

Banks and other highly leveraged institutions will try to unload assets at fire-sale prices in illiquid markets. Even assets not viewed as toxic before will become unsaleable at any price.

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Justin responds to our colleague Jim Poniewozik's rumination that maybe the media is to blame for the bailout bill's failure. The argument: the mainstream business press dropped the ball on clearly articulating what awful things would happen to ordinary Americans if Congress didn't pass a rescue package.

Like I said, Justin takes that notion head on here. And I do my own bit of trying to explain why certain people don't make the connection between the credit crunch and their own lives in this story that just went up on Time.com.

I'm also going to refer everyone back to part of Fed chairman Ben Bernanke's testimony before the House Financial Services Committee last Wednesday. It's the part where our country's top economist explains what will happen if we don't do something quickly. I think the back-and-forth he has with Rep. Steve LaTourette, an Ohio Republican who voted against the bill, also nicely encapsulates the frustration on both sides of the debate—the side that understands why we need to take grand action, and the side that doesn't. The bulk of the exchange is after the jump:

MR. BERNANKE: Thank you, Mr. Chairman.

Excellent points that Mr. Kanjorski asked about before. This is all esoteric Wall Street stuff. It doesn't make any -- have any meaning to people on Main Street, but it connects very directly to their lives. Credit is the lifeblood of the economy. If the -- if the credit system isn't working, then firms cannot finance themselves. People cannot borrow to buy a car, to send a student to college, to buy a house. That's not just an inconvenience, because if that is true generally, it's going to cause the economy to slow markedly. We've already seen the effects of that. A lot of the slowdown in the economy we've seen over the last six months to a year comes from the credit crunch, which is affecting all parts of the market.

My --

REP. LATOURETTE: Mr. Chairman, if I could just interrupt you for a minute. I get that. But I'm telling you, the guy at home, he says, "The market is something that my neighbor with the swimming pool is dabbling in. I just go and work in a factory" --

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First, Jim Poniewozik. Now, Jimmy Pethokoukis, with a couple of presumably well-plugged-in thoughts on what might happen next on Capitol Hill:

1) The Democrats could push through the bailout with more Democratic votes by adding in a stimulus package or a provision that would allow bankruptcy judges to unilaterally change mortgage contracts. With the markets in chaos, Bush would have almost no choice but to sign it. (Conspiracy theorists speculate this was Nancy Pelosi's plan all along.)

2) Continuing market chaos could push dissenting Republicans to vote for the plan as long as there is some modification that would serve to justify their change of hearts, such a change in the oversight provision that would make it harder for Treasury to spend the dough. Some sort of tax sweetener, either for buyers of the bad assets or for homeowners, would be better.

Yeah, I guess going back to the drawing board and returning with a clear plan to recapitalize the banking system would be too much to ask for. As for me, I need to find some more bloggers named James with unpronounceable surnames that begin with P to respond to. Anybody got any suggestions?

Jim Poniewozik wonders if continued opposition to the bailout plan stems in part from the media's failure to explain the potential consequences:

[W]hat we've generally seen are either dire—but very vague—warnings, or the general argument that, if credit dries up, that affects loans to businesses and little guys, and people start to lose jobs.

That's all well and good as far as it goes. But it doesn't get to the question of degree. Businesses will be hurt—OK. But businesses are hurt in a lot of economic downturns, some of them mild, some of them so catastrophic they threaten our civilization. Which is this? How badly will business be hit? Like in a typical recession? Or like in 1929? ...

Maybe nobody really knows. (In which case, you've got an obligation to say unambiguously: Nobody really knows.) Maybe they fear creating a panic, and at the same time fear not having anticipated a disaster if it happens, so they cover all bases, leaving their audience confused in the process.

Let me say it unambiguously: Nobody really knows. Barbara's got a piece going up soon at TIME.com (update: here it is) about the effects of the credit crunch that regular folks are already feeling, but they're all of the "typical recession" ilk. And most of the specific warnings you hear from economic forecasters are also along the lines of "unemployment could top 7%." Which is no good if you're part of that 7%, but not a national disaster. Part of the issue surely is just that we're just a nation of whiners who haven't experienced a serious recession since the early 1980s.

I think there is a risk of something dramatically worse than that happening, though. Nobody is able to articulate it clearly because (a) they don't know how likely it is and (b) they don't know how it will play out. It won't play out like the Great Depression, because we now have activist central banks in U.S. and Europe that will keep the money supply from shrinking and an FDIC in the U.S. that will insure that few bank depositors will lose any money. It won't play out like Japanese slump of the 1990s because, for all their flaws, our bankers and our regulators aren't in complete denial. It won't play out like the East Asian financial crisis of the late 1990s, because we borrow in our own currency. And it won't play out like the Scandinavian financial crisis of the early 1990s because we're a big huge country that plays a central role in the global financial system and global economy.

I think it's that last part, coupled with the apparent fragility of the whole structure of securitization and derivativization that has grown up over the last quarter century, that gives people like Ben Bernanke nightmares. But you know how nightmares are: They can be really scary, but it's really hard to explain what's so scary about them after you wake up.

Update: I just had a brilliant thought. Since what we're dealing with is a vague yet possibly gigantic threat, maybe what Congress needs to do is appropriate a vague yet possibly gigantic amount of money. I'll get to work drafting a bill on that pronto.

Yes, we had a 777-point drop in the Dow industrials yesterday, but, as our colleague Jyoti Thottam reports, Asian markets trembled but for the most part held up today. She writes:

Japan's Nikkei Index fell 4.1% on Sept. 30; after declining in early trading, stocks in China and Hong Kong eked out small gains. "The reaction was not as bad as I had feared," says Dariusz Kowalcyzk, chief investment strategist of CFC Seymour, a boutique investment bank in Hong Kong.

Could all those people who flooded the House with phone calls against the bill be right? Could Armageddon not be around the corner? After all, consumer confidence is actually up, according to the Conference Board survey released today (which ran through Sept. 23). I'm looking at the TV, and the markets are up, too, with a bunch of bank stocks rallying.

I'd encourage a little perspective. First of all, we're already talking about the many ways Congress can step back in starting on Thursday and revive the bill. Maybe they'll try for another vote in the House, maybe they'll go to the Senate first this time. The point is, we still have options.

Second, this was never a stock market issue. Credit is still all locked up. Nothing doing there.

And finally, the stock market has a long reputation for being schizo. Let's all pull out our Benjamin Graham and remember: "In the short run, the market is a voting machine, but in the long run it is a weighing machine."

Barbara!

Welcome to all of you coming from the link in TIME magazine. This was my original response to a reader's questions. It was condensed and edited for the magazine, but I've left it untouched here.

I got an e-mail from a reader late last week with a bunch of very good questions about the bailout bill. I hadn't quite finished answering them when it was voted down in the House Monday. But since some version of the plan is likely to be resurrected later this week, I figured I should go ahead and finish.

Where will the $700+ billion go? What exactly will it buy and from whom?

That's the, uh, $700 billion question. Mortgage-backed securities were to be the main target, and banks the main sellers. But Hank Paulson and Ben Bernanke wanted a fund that could buy pretty much anything from anyone.

How, exactly, is this bailout supposed to 'save' credit markets?

Not entirely clear. Paulson and Bernanke described it as a way to jumpstart trading in mortgage securities for which there's no market at the moment, thus allowing banks to clean up their balance sheets and get back to lending. But a lot of economists outside government believe that the real problem is that lots and lots of financial institutions are insolvent--their losses, if they actually recognized them, are enough to wipe out their capital reserves. If that's true it would make more sense for taxpayers to give them cash outright, and take a big ownership stake in return (with the idea of selling it off a few years down the road). The Swedish solution, they call it (and longtime readers of this blog know it was being discussed here long before anybody else in the U.S. was talking about it). The version of the bailout plan voted down in the House Monday seemingly would have allowed Treasury to take such action. But it also would have allowed Treasury not to take such action.

(More after the break.)

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