After the House on Sept. 29 rejected a $700-billion federal lifeline for ailing financial firms, Democrats and Republicans angrily blamed each other for the outcome. But after the stock market took a nosedive, signals soon emerged on Capitol Hill that lawmakers were ready to try again. The outcome is being closely watched in the construction industry, which has been squeezed by tighter credit. If Washington does not come to the rescue, industry officials fear things will only get worse.

Guy Lawrence/ENR

Trying to win over critics of Treasury Secretary Henry M. Paulson Jr.’s Sept. 19 proposal to buy up to $700 billion in sickly mortgages and related securities, congressional negotiators started modifying the plan. They added provisions to release the money in phases, require more oversight, offer protection for mortgage holders and ban “golden parachutes” for executives at firms from which the Treasury bought securities.

But even with the changes, too many House Democrats and Republicans were not satisfied. Right after the plan was shot down by a 228-205 vote, bad blood between the parties was flowing at dueling press conferences. With the rancor, however, there also were glimmerings that the plan was not yet dead. House Financial Services Committee Chairman Barney Frank (D-Mass.) said, “We are ready to keep working.” Speaker Nancy Pelosi (D-Calif.) said, “Stay tuned.” On the GOP side, Minority Leader John Boehner (R-Ohio) said, “We have no choice, in my view, but to work together to try to find a solution to make sure that we save our economy and we save our constituents.”

On Sept. 30, there were further hopeful hints, some from the Senate Majority Leader Harry Reid (D-Nev.). “We are all committed to keeping the progress of the rescue package moving forward,” he said. “The fact is that we need to act soon,” added key Senate Republican negotiator Judd Gregg (Vt.). “This is not a situation which is going to get any better with time.”

Reid and Pelosi said in a letter to President Bush that they were “committed to working with you and our Republican colleagues to enact a bipartisan bill without further delay. Working together, we are confident we will pass a responsible bill in the very near future.”

Feeling the Pain

While the fate of a bailout plan in Washington was uncertain, construction industry officials around the country clearly are feeling the credit crunch. “My sense is that the market has really turned just in the last couple of weeks, that suddenly many contractors are telling me that the developers are not able to get funds,” says Ken Simonson, the Associated General Contractors’ chief economist. “It is as if the credit window was slammed down on their fingers just as they were reaching for a loan.”

Simonson points to the federal takeover of Fannie Mae and Freddie Mac as a key development. That action “wiped out” the value of some firms’ preferred stock in Fannie and Freddie, he says. “Many community banks were counting that stock as part of their capital. Now, those banks are scrambling to raise more capital rather than being in a position to lend out to others,” he adds.

AP/Wideworld

AP/Wideworld Pelosi (top center) and Boehner (bottom center) may yet reach a deal.

“All of your regional and small banks have these loans out to builder-developers that, in today’s market, are probably worth at best 50¢ on the dollar,” says Troy Taylor, CEO of Algon Group, a financial advisory and investment banking firm in Atlanta. He calls the Florida loan market “a bloodbath” and says the Florida Panhandle and Atlanta areas are two of the worst markets in the U.S.

Even before the Treasury Dept. announced the outline of its proposal on Sept. 19, “the medium-sized regional banks that do the bulk of project financing were already retrenching,” says Darrin Weber, president of IMA of Texas Inc., a Dallas-based financial-services and risk-management firm. He says the greatest pressure has been on projects costing more than $40 million, adding that developers have told him “that kind of financing was almost impossible to get done.”

Difficulties in borrowing money or selling bonds also have affected the North Texas Tollway Authority’s toll-road plans, says Joe Dirik, an attorney with the construction law group of Fulbright & Jaworski LLP, Dallas. “The credit crunch may eventually cause NTTA to seek assistance from the state or regional partners,” he says.

“I believe it is essential that there be some intervention...now,” says Michael Szkatulski, senior managing director of building developer Mesirow Stein Development Services Inc., Chicago. “If there is none, it seems like we may be headed toward an almost complete shutdown of our financial systems.” He says a key point is “there there is such a lack of confidence that markets have seized, and the price that will be paid will be the cost of restarting an economy.”

Congress needs to act but focus on the central issue, says Stephen Fuller, director of George Mason University’s Center for Regional Analysis, Fairfax, Va. “We gave consumers stimulus checks to boost the economy, when really we had a housing problem,” he says. “What we need is to help keep banks lending and allow them to be confident in the market again.”

“Congress will regroup and have a slightly different bailout package before the end of this week,” says David Richter, president of Hill International, Marlton, N.J. The project management firm went ahead with a Sept. 24 announcement that it was forming a real-estate development unit to partner with institutional equity firms to “pursue deals across the investment spectrum, not just those with development and construction components.”

“The industry will fare better than others because businesses are far less leveraged than most,” adds Paul Zofnass, president of EFCG Inc., a New York City financial management consultant.

Still, some warn that any bailout plan will have holes in it. Even if a proposal of $700-billion magnitude is approved, “this by itself is not going to solve the problem,” says Algon Group’s Taylor. “I’m 99% certain that...$700 billion is not going to take care of every bad loan in the country.”