WASHINGTON -- The Bush administration and Congress closed in on a new compromise aimed at stabilizing U.S. financial markets, a move designed to assuage conservatives who one day earlier had staged a revolt against the controversial $700 billion project.

The potential compromise isn't yet final, and details could change. But as of Friday night it appears that the plan's central elements, as originally envisioned by the Treasury Department, remain intact.

Senate Banking Committee Chairman Dodd, center, standing with House Financial Services Committee Chairman Frank and Sen. Schumer. Associated Press

Congressional leaders were planning for possible votes Sunday.

The renewed effort represents a remarkable turnaround from the fracas that engulfed Washington Thursday night. In a sign of the political tensions at play, an earlier compromise plan was thrown into disarray after a White House meeting of top leaders -- including the two presidential candidates -- descended into a shouting match.

Republican nominee Sen. John McCain had returned to Washington to attend bailout negotiations. But the interjection of the presidential campaign, and the resulting finger-pointing, upset the delicate balance that had been struck in negotiations between congressional Democrats and Treasury Secretary Henry Paulson.

"I would hope the two presidentials would go to the debate tonight and leave us alone to get our work done here," said Sen. Harry Reid, a Nevada Democrat, sounding exhausted on the Senate floor Friday morning.

Under the Bush plan, the Treasury Department would be able to buy $700 billion of toxic investments currently burdening many financial institutions. The hope is that doing so would encourage investors to recapitalize the struggling banks, and get the nation's bond markets working again.

It would also, however, put taxpayers on the hook for potential losses if the investments bought by the government didn't later recover some of their value.

House Republicans, antsy about the power granted to the Treasury under that original plan, wanted to replace it with one based on an insurance model: Banks would pay premiums into a pool of money that would then be used to cover losses on the bad assets in question.

Treasury officials had earlier told lawmakers the concept was unworkable, people familiar with the matter said. Indeed, officials there briefly considered it, but concluded it wouldn't be as effective in clearing the rot from banks' balance sheets.

The compromise being hammered out Friday night would graft the insurance concept onto the original Treasury plan, most likely as an option. That would satisfy the administration, which could chose not to use it, as well as conservative lawmakers, who can claim to have influenced the legislation.

The White House has already agreed to other Democratic demands for the bailout, including greater oversight of the plan, and pay curbs for executives at some companies that benefit from the bailout.

The administration also agreed to a commitment to help struggling homeowners. And it agreed for the $700 billion to be released in installments; $250 billion would be made available immediately.

As Friday unfolded, Democrats signaled a willingness to consider including some version of the insurance proposal. "Adding insurance as an option...that's never been an issue," said Rep. Barney Frank (D., Mass.), chairman of the House Financial Services Committee and a lead negotiator.

At a late-afternoon news conference, House Speaker Nancy Pelosi sounded conciliatory, suggesting that Mr. Paulson should have "the latitude to accept any and all proposals," so long as they don't interfere with the core goals of the bailout plan.






By midweek, it became clear that only a couple dozen of the 199 House Republicans were likely to support the plan in its existing form.

House Republicans say their alternative proposal would bring stability and new capital to the market. It would also remove regulatory barriers that they say block private investors from investing capital into ailing financial institutions.

"We were simply trying to come up with a constructive solution to break an impasse," said Rep. Paul Ryan (R., Wis.), who outlined the plan to Sen. McCain in a meeting Thursday.

The struggle over the bailout bill represents one of the most dramatic congressional showdowns of recent years. In 1990, the Democratic House voted down a major deficit-reduction package backed by the administration of the first President Bush. The package was later brought back to the floor and approved, but only after changes that tilted the measure to the left.

A few years later, the Republican-controlled Congress balked at the Clinton administration's plans to help rescue Mexico's economy, forcing the administration to use other measures to achieve its goals.

At a closed-door meeting of House Republicans on Friday, House Minority Leader John Boehner and other party leaders received an ovation for having resisted pressure to support the Bush-backed package during a White House meeting the previous day.

Write to Greg Hitt at greg.hitt@wsj.com, Sarah Lueck at sarah.lueck@wsj.com and Deborah Solomon at deborah.solomon@wsj.com