By Jessica Holzer and Michael R. Crittenden . Of DOW JONES NEWSWIRES .
WASHINGTON (Dow Jones)--As another U.S. financial institution failed, congressional leaders scrambled Thursday night to salvage a $700 billion rescue for Wall Street that was thrown into disarray by House Republicans who balked at a plan that relies on taxpayer funds.
House Republicans floated an alternative plan instead that they said would have private market participants insure toxic mortgage assets rather sell them to the government. Meanwhile, Washington Mutual Inc. (WM) failed and its deposits were acquired by J.P. Morgan Chase & Co. (JPM) in a deal brokered by the Federal Deposit Insurance Corp., highlighting the continued stress facing the U.S. financial system.
Resistance from House Republicans caught the Bush administration and Democratic leaders in Congress off guard, leading to a hastily called meeting with Treasury Secretary Henry Paulson to try and sort out House Republican concerns.
"The big problem is the taxpayer element of this," said Rep. Paul Ryan, R-Wisc., the top Republican on the House Budget Committee. "The key is to do this without taxpayers bailing us out."
Sen. Robert Bennett, R-Utah, said top congressional leaders moved to regain control of negotiations over the package. "We never had a deal," Bennett said. "We had what we thought was a framework of an agreement that might work." Bennett said leaders plan to reduce the number of participants in negotiations going forward.
Senate Majority Leader Harry Reid, D-Nev., said getting House Republicans on board with an agreement was key for the rescue package to clear Congress. "If we can get support from the House Republicans this could be done in a matter of days," Reid said at an evening press conference.
House and Senate leaders met on the Senate side of the Capitol Thursday evening to discuss a way to overcome the impasse. Reid said both Paulson and Federal Reserve Chairman Ben Bernanke were invited to attend the meeting. A Fed spokeswoman said Bernanke did not plan to attend.
The only House Republican initially at the meeting was Rep. Spencer Bachus of Alabama, the ranking GOP member of the House Financial Services Committee. Bachus emerged from the 8 p.m. EDT meeting after less than 30 minutes, sounding extremely pessimistic.
"I hope we get a plan by the weekend," Bachus said. "It's been frustrating."
Just seven hours earlier Bachus had joined a bipartisan group of lawmakers to announce a "fundamental agreement" on the rescue plan for Wall Street. Within a few hours, however, House Republicans said Bachus did not have the authority to negotiate in their name and were floating their own proposal despite the fact that House and Senate negotiators have been working closely with the Treasury Department and Bush administration on the rescue plan.
President George W. Bush, Paulson, key House and Senate lawmakers and presidential candidates Sen. Barack Obama, D-Ill., and Sen. John McCain, R-Ariz., were present at the White House meeting when House Republican Leader John Boehner, R-Ohio, announced that his rank-and-file wouldn't support the deal.
Speaking to reporters at the Capitol, Boehner spokesman Michael Steel asserted that there had not been any negotiations yet between House Republican and Democrats.
"At this point, we're waiting for a bipartisan negotiation that includes the House Republicans," he said.
Democrats said they were caught off-guard by House Republicans misgivings.
"No one brought it up yesterday," Senate Banking Committee Chairman Christopher Dodd, D-Conn., said of the alternative plan. "No one suggested there was an alternative core idea."
In a statement issued before the evening meeting between Paulson and lawmakers, a Treasury spokeswoman said, "Treasury staff has been working with Congressional committee staff since Saturday. There are still open issues to be resolved, and we are committed to resolving them."
House and Senate lawmakers of both parties announced after meeting earlier in the day that they had reached agreement on the broad parameters of the plan.
But the Republicans who attended that meeting, including Sen. Bennett apparently did not speak on behalf of House Republicans. Steel said that Bachus wasn't empowered to negotiate for House Republicans.
He also asserted that a meeting between Boehner and House Speaker Nancy Pelosi, D-Calif., earlier this week on the plan did not count as negotiations.
After the White House meeting, Pelosi told Paulson that he needed to convince House Republicans to get on board, according to Brendan Daly, a Pelosi spokesman.
Pelosi spokesman Nadeam Elshami said the plan would not move forward without the support of House Republicans.
"The speaker has said this has to be a bipartisan bill," he said.
House Financial Services Chairman Barney Frank, D-Mass., said that despite the last-minute chaos House and Senate Democrats, Senate Republicans and the Bush administration were close to a deal.
Asked whether Democrats would move ahead with the plan without House Republicans, House Majority Leader Steny Hoyer, D-Md., said, "If it's going to pass, it needs to be bipartisan."
Frank said in this morning's meeting, Bachus made no mention of an alternative plan. However, he said Bachus told lawmakers he didn't have authority to negotiate on behalf of House Republicans.
"I'm frankly somewhat puzzled at this stage," he said.
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