House Democrats stalled Bush’s Colombia free-trade pact, the papers say. The New York Times notes on C1 that the party-line vote “masks deep party divisions on the issue” among Democrats. Republicans say Speaker Nancy Pelosi is trying to prevent a difficult pre-November vote for her party, which sounds about right, considering that the Los Angeles Times flat-out says the vote delayed any consideration until after the election:

With trade increasingly prominent in the presidential campaign, Tuesday’s vote saved Clinton and Obama from a difficult choice: The pact was backed by business groups that support the two candidates, but it was vehemently opposed by a traditional Democratic ally—organized labor, which has condemned the ongoing slayings of Colombian labor activists.

The Wall Street Journal gets a better angle out of the news, saying senior administration officials are calling on “rattled” trade partners and international officials to reassure them that the U.S. is still pro-free trade, but they’ve been “greeted with reticence.”

The Financial Times:

Fred Bergsten, director of the Peterson Institute, said the consequences of the Colombia vote were “enormous” nevertheless.

“This is a calamity for the world trading system,” he said. “It undermines the whole basis for international confidence in the US as a trading partner.”

McCain gets religion on housing crisis

John McCain flipped his stance on the housing crisis, calling for a bailout of up to $10 billion of some homeowners, the papers say. The GOP candidate called for a Department of Justice investigation of the housing industry and the structured finance mentioned above, as well.

The WSJ says the plan “may mark a turning point in the Washington debate” from whether to help homeowners to how much to help them. McCain would allow underwater homeowners (not Atlantis-like underwater, we mean those who owe more than their houses are worth) to get new and cheaper fixed-rate, thirty-year notes with part of the loan written off by lenders and the note guaranteed by the Federal Housing Administration.

“The plan is more aggressive than one offered by President Bush and less aggressive than Democratic legislation taking shape in Congress…” the Journal says.

The LAT says Big Mac’s plan would apply only to notes taken out after 2005 for primary residences, which sounds sensible, as does much of this quote from The Washington Post:

“Tax breaks for builders, funds to purchase homes in foreclosure and tax credits that are not targeted to where the need is greatest do not constitute the federal help that is warranted,” he said.

Two weeks ago McCain opposed a government bailout. The NYT:

Mr. McCain, an Arizona Republican, had been painted as uncaring by Democrats, and drew murmurs of concern from some Republicans, after a speech in California last month in which he cautioned that “it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers,” and noted that the crisis had been brought on by both lenders and borrowers.

The WSJ has a primer on the bailout plans.

Retail woes buried

The papers mostly underplay news from the retail sector that same-store sales tumbled 0.5 percent in March, the worst showing in thirteen years. Consumers reining in spending are helping Wal-Mart out—its same-store sales were up a still-anemic 0.7 percent.

The Journal puts the overall retail news on B1 but folds it into the fourth paragraph of a story about Gap sales falling 18 percent. The NYT runs an Associated Press story on C3, while the FT buries the overall same-store sales numbers in a positive Wal-Mart story.

The WSJ says on C1 that Linens ‘n Things will file for bankruptcy protection next week.

“Freedom” ain’t free

The Journal has a clever C1 story on Lehman Brothers going back to the financial-engineering well to help get it access to Federal Reserve cash. The investment bank has packed $2.8 billion in loans into something called “Freedom” which issued the very type of debt securities that got the bank into trouble in the first place. Only this time, there’s no worry about the market falling out from under them. There’s always a market with the Fed.

It even had the bonds rated by the credit firms. No word if Lehman took Moody’s skydiving on this one:

The Lehman deal shows how some of the issues brought to light by the credit crunch—such as the market’s dependence on credit-rating firms and Wall Street’s affection for complex investment structures—are still very much a part of market activity.

“The loss of confidence in structured-finance ratings is at the heart of the current market crisis,” said Ed Grebeck, chief executive of Tempus Advisors, a debt-strategy firm. “For investment banks to go back to the ratings firms and say, ‘Here’s a new structure for you to rate investment grade’—that’s shocking to me.”

The Fed likes to pretend it’s not taking on junk as collateral in its cash drop on Wall Street. Bull.

The loans in the pool included debt that was issued to finance last year’s leveraged buyouts of First Data Corp. and TXU Corp., a person familiar with the matter said.

A number of Wall Street executives called Lehman’s move “brilliant” and said they may follow suit. One senior finance executive at a rival of Lehman’s said his main reservation with Lehman’s move was that it might lead to criticism that Wall Street is taking its junk to the Fed for cash…

“It’s a very creative way for investment banks to get liquidity from assets that they don’t want to sell at fire-sale prices,” said Todd Kesselman, managing director of Precision Capital…

How Moody’s got greedy

The WSJ has a damning A1 report on the big cultural shift at credit-ratings firm Moody’s that fostered the epidemic of mortgage-bond overrating that fed the housing bubble.

Beginning in the late 1990s, Moody’s attitude toward the financial institutions whose debt products they rated moved from adversarial to overly accommodating—a stance that was more appropriate for the industry’s conflict-of-interest laden business model. Business soared, with profits up nearly five times in six years by 2006.

Here’s the lede:

Bond-rating agency Moody’s Investors Service used to be an ivory tower of finance. Analysts were discouraged from having a drink with a client. Phone calls from bankers went unanswered if they rang during intense, almost academic debates about credit ratings.

A decade ago, as the housing market was just beginning to take off, Moody’s was a small player in analyzing complex securities based on home mortgages. Then, Moody’s joined Wall Street and many investors in partaking of the punch bowl.

A firm once known for a bookish culture began to focus on the market share that affected its own revenue and profit. The rating firm became willing, on occasion, to switch analysts if clients complained. An executive overseeing mortgage ratings went skydiving with a client. By the height of the mortgage-securities frenzy in 2006, Moody’s had pulled even with its largest competitor, rating nine out of every 10 dollars raised in these instruments. It gave many of the bonds its coveted triple-A rating.

The story focuses on Brian Clarkson, now president of the firm and the exec who led the about-face in its structured-finance unit, overhauled its ratings to enable higher ratings, and fired cautious analysts in favor of those who puffed up the ratings.

Have fun in front of Congress, buddy.

Of arbitration and litigation at nursing homes

Also on page one, the Journal writes that nursing homes are increasingly requiring patients and their families to sign away their right to sue before they enter the homes.

The clause can have profound implications. Nursing homes’ average costs to settle cases have begun dropping, according to an industry study, even as claims of poor treatment are on the rise. The industry notes arbitration is slicing the number of patients winning big punitive judgments, the added penalties for severe negligence that can pump up the size of jury awards. Meanwhile consumer advocates, plaintiffs lawyers and even some arbitrators are decrying the practice. Two U.S. senators on Wednesday introduced legislation to effectively ban nursing homes from using agreements that compel arbitration in advance.

The WSJ says the move is part of a broader trend of companies trying to prevent lawsuits by bypassing “emotion-laden juries.” But it reports that the largest arbitration firms typically won’t take nursing-home cases on since patients “really are not in an appropriate state of mind to evaluate” it. The Journal notes that arbitration awards against companies are typically less than jury awards, and quotes an arbitrator estimating that they’re less by about two-thirds.

The (down) beat goes on

In economic news, a WSJ survey of economists finds that three-quarters say the economy is in recession and hasn’t yet hit the trough. They expect unemployment to rise to 5.6 percent by the end of the year. Sixty-seven percent say home prices won’t turn around until sometime in 2009.

Initial jobless claims declined much more than expected last week, to 357,000 from 407,000, but the total number of unemployed rose to a near four-year high, Bloomberg reports.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu.