Legg Mason Capital Management CEO Bill Miller on Wednesday blasted the recently announced government bailouts of private companies for driving down their stock value — and said that if the bailouts continue, funds like his will be less inclined to invest in challenged companies.

“If the government tells the financial system it needs to go raise capital, then they seize all the capital, who’s going to put capital in?” Miller said in a wide-ranging discussion with reporters Wednesday evening. “My view is, we can’t do this anymore if they’re going to seize our capital.”

Capital Management and its subsidiaries upped their stake in mortgage financier Freddie Mac (NYSE: FMC) in July, only to find a couple of months later that a government bailout of Freddie and its counterpart Fannie Mae (NYSE: FNM) would wipe out most of shareholders’ investment. Legg Mason Capital also owned about 30 million shares of insurer AIG (NYSE: AIG), now in an $85 billion government bailout. Legg recently sent a representative to a meeting in which AIG shareholders tried to hammer out a deal in which they would put in new equity and AIG would sell assets to “get the government a quick win” in exchange for less of a hit to the shareholders, Miller said. How that will play out is still unclear.

A significant and immediate tax credit for financial institutions to purchase homes would be a more effective solution for the financial crisis than the proposed $700 billion federal bailout, says BB&T Chief Executive John Allison.

The federal government should also buy homes, and not securities backed by mortgages, he wrote in a Sept. 23 letter to the U.S. Congress.

“This is a housing value crisis,” Allison wrote. “It does not make economic sense to purchase credit card loans, automobile loans, etc. The government should directly purchase housing assets, not real estate bonds.”

In his letter, Allison questions how the government will pay the proper price for distressed real estate assets. Overpaying will harm taxpayers, while underpaying will hurt real estate markets. He also believes allowing homeowners to use the bankruptcy to restructure their loans will “force losses on banks.”

He adds the primary beneficiaries of the proposed rescue are The Goldman Sachs Group Inc. (NYSE:GS) and Morgan Stanley (NYSE: MS). The U.S. Treasury, he says, is “totally dominated by Wall Street investment bankers,” and “cannot be relied on to objectively assess all the implications of government policy on all financial intermediaries.”

Allison also said it is “inappropriate that the debate is largely being shaped by the financial institutions who made very poor decisions.”

He pins the responsibility for the crisis on Freddie Mac and Fannie Mae.

WASHINGTON (AP) - Urgent efforts to lash together a $700 billion rescue plan for the national economy broke apart Thursday night, hours after key lawmakers had declared they had reached a deal.
Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke sped to Capitol Hill to try to revive or rework the proposal that the administration says must be quickly approved by Congress to stave off economic disaster.

Congressional leaders were to meet with the economic chiefs into the night.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.

WASHINGTON (AP)—Key members of Congress claimed agreement Thursday on an outline and crucial details of an urgent multibillion-dollar plan to stave off national economic disaster, but a historic White House meeting with President Bush, the two men fighting to replace him and other congressional leaders broke up with conflicts in plain view.

After six days of intensive talks on the $700 billion package urgently requested by the Bush administration, with Wall Street tottering and the presidential election nearing, there was more confusion than clarity.

A tentative accord in principle among influential Democratic and Republican lawmakers was announced at midday, giving the Bush administration just a fraction of the money it wanted up front, with half the $700 billion total subject to a congressional veto, congressional aides said.

But conservatives were still in revolt, balking at the astonishing price tag of the proposal and the heavy hand of government that it would place on private markets. Sen. Richard Shelby of Alabama, the top Republican on the Senate Banking Committee, emerged from the White House meeting to say the announced agreement "is obviously no agreement."

Both of Congress' Republican leaders, Rep. John Boehner and Sen. Mitch McConnell, also denied there was any deal. And the White House called the earlier announcement progress but also said it was reviewing the outline with more work needed to finalize a bill for Congress to rush into law.

There is wide agreement the U.S. economy is in peril, with financial institutions going under or near the edge and recession looming along with the resulting layoffs and increased home foreclosures.

There had been hopes for broad agreement, too, on a prescription by now, with a confident White House announcement by the president, John McCain, Barack Obama and congressional leaders.

But the best McConnell would say afterward was, "It's clear that more progress is needed and we must continue to work together quickly to protect our economy."

One group of House GOP lawmakers circulated an alternative that would put much less focus on a government takeover of failing institutions' sour assets. This proposal would have the government provide insurance to companies that agree to hold frozen assets, rather than have the government purchase the assets. Rep Eric Cantor, R-Va., said the idea would be to remove the burden of the bailout from taxpayers and place it, over time, on Wall Street instead.

Democrat Obama and Republican McCain, who have both sought to distance themselves from the unpopular Bush, sat down with the president at the White House for an hourlong afternoon session that was striking in this brutally partisan season—but also, according to one participant, "a full-throated discussion." By also including Congress' Democratic and Republican leaders, the meeting gathered nearly all Washington's political power structure at one long table in a small West Wing room.

"All of us around the table ... know we've got to get something done as quickly as possible," Bush told reporters, brought in for only the start of the meeting. Obama and McCain were at distant ends of the oval table, not even in each other's sight lines. Bush, playing host in the middle, was flanked by Congress' two Democratic leaders, House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid.

All the visitors left the White House without talking to a huge media group.

Under the accord announced hours earlier among key lawmakers, the Treasury secretary would get $250 billion immediately and could have an additional $100 billion if he certified it was needed, an approach designed to give lawmakers a stronger hand in controlling the unprecedented rescue. Aides described the details on condition of anonymity because they were not authorized to speak publicly.

The plan's centerpiece still is for the government to buy the toxic, mortgage-based assets of shaky financial institutions in a bid to keep them from going under and setting off a cascade of ruinous events, including wiped-out retirement savings, rising home foreclosures, closed businesses, and lost jobs.

The Bush administration has made near-daily concessions to demands from the right and the left, among them a limit on pay for executives of bailed-out financial institutions and an equity stake in rescued companies for the government.

Despite the Republican outcry, Banking Chairman Chris Dodd, D-Conn., and Republican Sen. Bob Bennett, among others, said the negotiators from Congress and the administration had arrived at a deal that could win approval. Other key lawmakers said that after days of bare-knuckles negotiations there was little of note left to resolve.

Wall Street showed its pleasure—but the markets closed before the White House meeting and before the negative Republican comments started piling up. The Dow Jones industrials closed some 196 points higher, though that was down from larger gains earlier in the day.

Despite the national prominence of Bush, McCain and Obama, none has been deeply involved in this week's scramble to hammer out a package.

But the developments on the Hill lent fresh purpose to their White House session: the hope of providing bipartisan encouragement—and political cover—for lawmakers of both parties to accept a plan. Bush has asked that lawmakers approve a plan within days, before lawmakers adjourn to campaign for their own re-elections.

So far, though, there was still nothing to sell.

McCain, in particular, was being leaned on by Democrats and fellow Republicans alike to deliver GOP votes. Placating them enough to bring them in line could be a tall order for the Republican presidential nominee who has a checkered relationship with the right wing of his party.

Layered over the White House meeting was a complicated web of potential political benefits and consequences for both Obama and McCain.

McCain hoped voters would believe that he rose above politics to wade into successful, nitty-gritty dealmaking at a time of urgent crisis, but he risked being seen instead as either overly impulsive or politically craven, or both. Obama saw a chance to appear presidential and fit for duty, but was also caught off guard strategically by McCain's surprising gamble in saying he was suspending his campaigning and asking to delay Friday night's debate to focus on the crisis.

SAVING the world is a thankless task. The only thing beyond dispute in the $700 billion plan of Hank Paulson, the treasury secretary, and Ben Bernanke, chairman of the Federal Reserve, to stem the financial crisis is that everyone can find something in it to dislike. The left accuses it of ripping off taxpayers to save Wall Street, the right damns it as socialism; economists disparage its technicalities, political scientists its sweeping powers. The administration gave ground to Congress, George Bush delivered a televised appeal and Barack Obama and John McCain suspended the presidential campaign. Even so, as The Economist went to press, the differences remained. There was a chance that Congress would say no.

Spending a sum of money that could buy you a war in Iraq should not come easily; and the notion of any bail-out is deeply troubling to any self-respecting capitalist. Against that stand two overriding arguments. First this is a plan that could work (see article). And, second, the potential costs of producing nothing, or too little too slowly, include a financial collapse and a deep recession spilling across the world: those far outweigh any plausible estimate of the bail-out’s cost.

Mr Market goes to Congress
America’s financial system has two ailments: it owns a huge amount of toxic securities linked to falling house prices. And it is burdened by losses that leave it short of capital (although the world has capital, not enough has been available to the banks). For over a year, since August 2007, central bankers, principally Mr Bernanke, have been trying to make this toxic debt liquid. But by September 17th, following the bankruptcy of Lehman Brothers and the nationalisation of American International Group earlier that week, the problem started to become one of the system’s solvency too. The market lost faith in a strategy that saved finance one institution at a time. The economy is not healing itself. If credit markets stay blocked, consumers and firms will enter a vicious spiral.....

Money-market rates around the world soared on concern the U.S. Treasury's $700 billion bailout plan will be diluted as it makes its way through Congress, causing banks to hoard cash to meet their future funding needs.

The three-month London interbank offered rate, or Libor, that banks charge each other for dollar loans jumped today by the most since 1999 and the euro rate rose to the highest level since November 2000. Rates in Hong Kong and Singapore climbed as Bank of East Asia Ltd. faced a run on deposits. The Libor-OIS spread, a measure of the availability of cash among banks, widened to the most on record.

``Liquidity in the money markets in maturities over a week is desperately scarce,'' said Tim Bond, head of global asset allocation at Barclays Capital in London. ``A near-term solution to the crisis is urgent. Unchecked, the current crisis would turn into a self-reinforcing vortex of defaults, bank-capital contraction and deep recession within a matter of weeks.''

Money-market rates signal banks have all but stopped lending to each other. Treasury Secretary Henry Paulson's bailout plan, which proposes removing tainted assets from bank balance sheets, may be cut back in size, U.S. House Budget Committee Chairman John Spratt said today. The U.S. faces a ``painful'' recession if the package isn't approved, President George W. Bush said yesterday.

`Nothing's Working'

Banks are balking at lending to each other because they are concerned counterparties may hold tainted assets at a time when demands on their own cash are rising.....

In the Roosevelt Room after the session, the Treasury secretary, Henry M. Paulson Jr. literally bent down on one knee as he pleaded with Nancy Pelosi, the House Speaker, not to “blow it up” by withdrawing her party’s support for the package over what Ms. Pelosi derided as a Republican betrayal.

“I didn’t know you were Catholic,” Ms. Pelosi said, a wry reference to Mr. Paulson’s kneeling, according to someone who observed the exchange. She went on: “It’s not me blowing this up, it’s the Republicans.”

Mr. Paulson sighed. “I know. I know.”

.....Without a mechanism to shed the bad loans on their books, financial institutions may continue to hoard their dollars and starve the economy of capital. Americans would be deprived of financing to buy houses, send children to college and start businesses. That would slow economic activity further, souring more loans, and making banks tighter still. In short, a downward spiral.

Fear of this outcome has become self-fulfilling, prompting a stampede toward safer investments. Investors continued to pile into Treasury bills on Thursday despite rates of interest near zero, making less capital available for businesses and consumers. Stock markets rallied exuberantly for much of Thursday as a bailout deal appeared in hand. Then the deal stalled, leaving the markets vulnerable to a pullback.

“Without trust and confidence, business can’t go on, and we can easily fall into a deeper recession and eventually a depression,” said Andrew Lo, a finance professor at M.I.T.’s Sloan School of Management. “It would be disastrous to have no plan.....”

Washington performed an astonishing high-wire act on Thursday, wobbling toward and then away from an unprecedented $700 billion emergency debt bailout that no one can say for certain will work. A long, frenetic day on Capitol Hill and at the White House produced much action but no result.

Congress faced on one side the possibility of economic calamity and on the other angry and baffled constituents and rebellions on the flanks of both parties. At the White House five weeks before the election, the two presidential candidates, Democrat Barack Obama and Republican John McCain, met to hash out the plan with a deeply unpopular president who soon will hand over to one of them the responsibility for carrying out a rescue of the world's biggest financial system.

In a panicked atmosphere and amid flaring tempers, Democrats and some Republicans announced before the White House meeting that they had the outline of an agreement, but GOP leaders refused to sign off on it. Liberal and conservative interest groups railed against the bailout, while business groups insisted that Congress pass the plan with all speed, warning that tight credit already is sharply slowing business activity.....

#

DEPOSITS.Not less than 20 percent of any profit realized on the sale of each troubled asset purchased under this Act shall be deposited as provided in paragraph (2).
#

USE OF DEPOSITS.Of the amount referred to in paragraph (1)

1.65 percent shall be deposited into the Housing Trust Fund established under section 1338 of the Federal Housing Enterprises Regulatory Reform Act of 1992 (12 U.S.C. 4568); and
2. 35 percent shall be deposited into the Capital Magnet Fund established under section 1339 of that Act (12 U.S.C. 4569).

#REMAINDER DEPOSITED IN THE TREASURY.All amounts remaining after payments under paragraph (1) shall be paid into the General Fund of the Treasury for reduction of the public debt.

This is just what the US is doing, so get ready for the lost decade. After this $700B, there's no way the government can bail us out over the decade that occurs after this week. They are right, this is our last shot, there is no Plan B.

As Congress wrestles with a $700-billion plan to buy up bad mortgages, many on Wall Street say the situation in the banking system has become desperate.

Credit -- the lifeblood of the economy -- has simply stopped flowing in many parts of the financial system over the last two weeks.

"Figuratively, institutions are putting money in a mattress," said Bill Gross, the chief investment officer of money management giant Pimco in Newport Beach.

Many banks have stopped making short-term loans to other lenders. Big investors are hoarding cash, and the only IOUs some will accept are those of the U.S. Treasury. States and cities suddenly face crushingly high interest rates if they try to sell bonds to finance government operations. And for many businesses and consumers, credit is harder to get -- if it's available at all.

The root of this crisis is the housing market's collapse, but the shock waves are reaching well beyond the real estate market and are threatening to make a full-blown recession inevitable.....

Washington hopes its sweeping bailout plan will get credit flowing again.

But will it work on Wall Street?

That is the $700 billion question swirling around the biggest financial bailout in American history. The first answer will come on Monday from the credit markets, where this crisis has unfolded for more than a year now.

As details of the plan trickled out on Sunday, few economists saw the rescue as a quick fix. Even if the frozen credit markets thaw a bit — and many analysts say they will — the good old days of easy money are over for now. The stock market, which has lost about 17 percent this year, is bound to remain volatile. To many, a recession seems unavoidable.

The first big question, however, is whether some semblance of calm will return to the credit markets. If the plan works as hoped, market interest rates that have been stuck at unusually high levels should start to ease.....