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Rescue Plan Talks Set Back by Republican Alternative (Update4)

By Jim Rowley and Alison Vekshin

Sept. 25 (Bloomberg) -- Negotiations on a $700 billion proposal to inject new capital into the paralyzed credit markets stalled after House Republicans offered a different solution to the financial crisis.

Senate Banking Committee Chairman Christopher Dodd said the agreement in principle he had reached earlier in the day with some Republicans was later undermined by a proposal offered by House Republicans led by Representative Eric Cantor.

Dodd said that if Treasury Secretary Henry Paulson backs Cantor's plan, then negotiations would ``have to start all over again.'' Talks are to resume tonight, Dodd said at a press conference.

The proposal that Dodd, Paulson and Federal Reserve Chairman Ben S. Bernanke had been pursuing would have the federal government buy troubled assets from financial companies.

The plan circulated by Cantor calls for a mortgage-backed security insurance fund, rather than taxpayer-funded purchases of those securities. The plan calls on the Treasury to design a system to charge premiums to MBS holders to finance the insurance, according to a fact sheet.

Republicans also seek ``temporary tax relief'' provisions aimed at allowing financial companies to free up capital. It also suggests that regulators call on financial institutions to suspend dividends, along with other steps to address liquidity problems.

`Wall Street Pays'

Cantor said the House Republican proposal ``does not leave the American taxpayers with the bag and makes sure that Wall Street pays for this recovery.''

Representative Jeb Hensarling of Texas said it shouldn't be ``Paulson's plan or no plan.''

Dodd said on CNN that the Republican plan threatens to force negotiations to begin anew. He said the White House meeting ``looked like a rescue plan for John McCain for two hours, and it took us away from the work we were trying to do today.''

Obama suggested the talks were damaged by politics.

``When you start injecting presidential politics into delicate negotiations you can actually create more problems rather than less,'' Obama said on CNN.

McCain's campaign said more negotiations were needed to draft legislation that would pass Congress.

``There is not yet a majority of Democrats and Republicans who are willing to vote yes for anything,'' said Steve Schmidt, a senior adviser to McCain's campaign.

Deny McCain

Kevin Smith, a spokesman for House Republican Leader John Boehner, said the speed with which Dodd's plan was put together was designed ``to deny Senator McCain a role in trying to craft a bipartisan solution.''

Cantor was told by Boehner to start working on an alternative two days ago, Smith said. Pelosi was told today.

Senate Majority Leader Harry Reid said negotiations will begin again tonight at the Capitol to ``see if we can put the train back on the tracks.'' Paulson and Bernanke were invited to attend the talks, Reid said.

Michele Davis, a spokeswoman for Paulson, said, ``Secretary Paulson appreciates the hard work by members on both sides of the aisle to address the threat we face to our economy,'' and urged lawmakers to resolve their differences.

Paulson has not rejected any ideas, Davis said. He has no plans to join tonight's negotiations, she said.