Bailout battle heads to weekend showdown

WASHINGTON (Reuters) - Congressional Democrats said on Friday they expected a deal on a $700 billion financial rescue by Sunday, before Asian financial markets open, as conservative Republicans agreed to negotiate.

Staff on Capitol Hill planned to work through the night to try to come up with a plan that would help unstick credit markets without unduly risking taxpayers' money.

"I believe that progress has been made," House of Representatives Speaker Nancy Pelosi said. "We will not leave until legislation is passed. We will be working through the weekend to achieve that end."

On Wall Street, where investors and economists have been clamoring for government help to clean up a credit crisis that has already cost banks some $500 billion, stock markets staged a late rally as investors bet a deal would be reached.

With less than six weeks to go before an election that will decide not only the next president but the makeup of the entire House and one-third of the Senate, Congress had hoped to recess on Friday so that members could go home and campaign.

But the rescue debate turned contentious on Thursday when a group of House Republicans proposed an alternate plan that would have Washington offer insurance coverage for the roughly half of all mortgage-backed securities it does not already back.

Sen. Charles Schumer, the New York Democrat who chairs the Joint Economic Committee, told CNBC he was willing to include that idea in the rescue package if that would bring House Republicans to the table.

Some Republicans, a party that historically advocates less government involvement in business, have objected to what they see as government interference in a private-sector problem.

In a move Democrats said should help break the logjam, House Republican leader John Boehner of Ohio appointed the No. 2 House Republican official, Rep. Roy Blunt of Missouri, as his lead negotiator to help gather Republican support.

Republican presidential candidate John McCain and his Democratic rival, Barack Obama, flew to Washington to try to help with negotiations at the White House on Thursday, and traveled to Mississippi on Friday for the first presidential debate.

HOUSE DIVIDED

Last week, the Bush administration proposed a plan to have the Treasury Department buy assets that banks are struggling to value, but it has been a tough sell with many taxpayers, who see it as a government demand they pay for mistakes made by wealthy Wall Street executives.

President George W. Bush said he expected Congress to pass legislation and a White House spokeswoman said it felt like a deal was close.

"There are disagreements over aspects of a rescue plan but there is no disagreement that something substantial must be done," Bush told reporters at the White House.

Lawmakers began reviewing a 102-page proposal based on a consensus outline hammered out by members of the House and Senate on Thursday, but divisions remained over how best to shield taxpayers from losses that could reach hundreds of billions of dollars.

Democrats abandoned attempts to insert a controversial bankruptcy aid provision into the bailout bill as they tried to push ahead with attempts to nail down legislation that lawmakers of both parties have said is an urgent priority.

"Our efforts are toward reaching agreement (so) that we can stabilize the economy and make sure we don't go deeper into recession or even into depression," House of Representatives Majority Leader Steny Hoyer, a Maryland Democrat, told CNBC.

Boehner had warned that a large majority of House Republicans would not support the plan as envisioned by the Treasury Department. Pelosi said Democrats did not have sufficient votes to pass legislation without Republican support.

"We want to be listened to," said Texas Republican Rep. Joe Barton. "People realize that if they want this to pass, it's going to take some Republican support and they're looking at some of these conservative ideas."

POLITICS ASIDE?

The White House said it was willing to give some ground to get a deal done, although it was cool to the mortgage insurance proposal. "Their concerns are legitimate. Their ideas are good ones. We've been able to accept many of them and we're open to accepting more." Ed Gillespie, a senior adviser to Bush, told reporters at the White House.

Obama said he was "optimistic" that a deal would get done. McCain's campaign said he would return to Washington immediately after the debate to resume the bailout negotiations. He spent the morning talking to members of the administration and Congress to try to reach agreement.

Democrats accused McCain of making matters worse by jumping off the campaign trail on Thursday to fly to Washington and join the talks.

"We're back on the progress track," said Rep. Barney Frank, chairman of the House Financial Services Committee. "We had a little bit of a glitch yesterday, but now that Senator McCain is safely in Mississippi we can get back to serious work."

(Additional reporting by Kevin Drawbaugh, Richard Cowan, Caren Bohan, Steve Holland, Andy Sullivan and Karey Wutkowski; Writing by Emily Kaiser; Editing by Peter Cooney)