July 23, 2011, 1:45 AM EDT
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By Julie Hirschfeld Davis

July 23 (Bloomberg) -- President Barack Obama, running out of time to strike a deal to raise the U.S. debt ceiling, had some bad news for House Speaker John Boehner on July 20.

The tax overhaul they had been discussing to raise $800 billion in revenue over a decade had to be bigger, Obama told Boehner and House Majority Leader Eric Cantor during an evening meeting in the Oval Office. Obama’s new offer: $1.2 trillion.

A new proposal by the “Gang of Six,” a bipartisan group of senators who were calling for $3.7 trillion in budget savings over 10 years to slash the deficit, had changed the dynamics of the accord that Obama and Boehner had been negotiating in closed-door talks for weeks, the president told the speaker.

The group, praised by both senior Republicans and Democrats for its mix of spending cuts and tax increases, proposed a bigger revenue target than Obama and Boehner were considering, according to officials on Capitol Hill and at the White House who gave their accounts of the talks on condition of anonymity.

And Obama, who had called for months for the sort of grand bargain the gang was offering, was going to have a hard time selling a deal that stopped short of that.

The turnabout ultimately led Boehner to walk out of the talks, he said last night, unraveling the progress that had been made toward a sweeping compromise to slice $3.5 trillion from the nation’s debt and raise the $14.3 trillion debt ceiling before a default threatened Aug. 2.

Back to Beginning

The breakdown sent both sides back to the beginning with little room left to reach a deal to boost the nation’s borrowing authority in time to head off the default. Congressional leaders from both parties are to meet today at the White House in an effort to reach an accord.

“It’s the president who walked away from his agreement and demanded more money at the last minute,” Boehner, of Ohio, told reporters at an evening news conference on Capitol Hill, hours after calling Obama to tell him he was abandoning their negotiations. “Dealing with the White House is like dealing with a bowl of jello.”

It was the final breakdown in the private negotiations between Obama and Boehner over a politically challenging debt- reduction agreement both were eager to reach.

“We had very intense negotiations,” Obama said last night. “I’ve been left at the altar now a couple of times.”

The courtship began June 18, when Obama, 49, invited Boehner, 61, for a round of golf at Andrews Air Force Base. The two teamed up against Vice President Joe Biden, who was spearheading bipartisan talks on the deficit with congressional leaders, and Ohio Governor John Kasich, a friend of Boehner’s.

Bonding Session

More bonding session than policy debate, the president and the speaker beat Kasich and Biden, winning $2 each. Still, the golf date proved a turning point, spurring Obama and Boehner to begin one-on-one talks on a broad compromise. Four days later, Boehner was at the White House meeting privately with Obama to sketch out what the deal could look like.

The following day, Cantor, a Virginia Republican who has cultivated a close relationship with Tea Party-backed lawmakers leading the call for spending cuts, abandoned the bipartisan Biden-led talks after a half-dozen meetings. He said Democrats’ insistence on raising taxes made an agreement impossible. The group had been making slow but steady progress, identifying more than $1 trillion in spending cuts the two parties could agree on.

The following week, Obama held a news conference in which he accused Republicans of siding with corporate-jet owners over children and the elderly in the negotiations, and compared Congress’s work ethic unfavorably with that of his pre-teen daughters.

Dire Consequences

“The yellow light is flashing,” Obama said during the June 30 news conference, warning of dire consequences if Congress didn’t raise the borrowing limit before Aug. 2. Standard & Poor’s said it would downgrade U.S. debt to junk status in the event of a default, and the Senate canceled its July 4 recess to continue talking.

The following Sunday, July 3, Boehner and Obama met secretly at the White House to continue their talks. Enough progress was made that Obama appeared at a White House briefing on July 5 to say the nation had “a unique opportunity to do something big to tackle our deficit,” and announce he was summoning congressional leaders from both parties for talks at the White House July 7.

At the roughly 90-minute meeting, Obama polled congressional leaders about what kind of deal they were seeking -- a limited one of between $2 trillion and $2.5 trillion over a decade, a medium-size agreement yielding about $3 trillion, or a big deal to cut $4 trillion off the debt.

Obama and Boehner both wanted to go big.

‘No Imminent Deal’

Still, Boehner -- cognizant of intense opposition among Republicans to any agreement that raised taxes -- cautioned that there was “no imminent deal about to happen,” saying there remained “serious disagreements.”

“We are this far apart,” Boehner told reporters, spreading his arms to indicate the gulf between himself and the president. Yet behind the scenes, his staff and Obama’s were beginning to exchange paper on the contours of a compromise to bridge that divide.

The White House was willing to consider major changes to Medicare, Medicaid and Social Security, including benefit cuts, that had previously been considered off-limits. Boehner was willing to discuss a tax overhaul that would raise revenue, until then dismissed by the Republicans as a tax increase.

Boehner’s aides, including Chief of Staff Barry Jackson and Policy Director Brett Loper, were haggling with Obama’s budget director Jack Lew and legislative liaison Rob Nabors on the details. Resistance was brewing in both parties to such a deal.

Pelosi Displeased

Meeting at the White House with Obama on July 8, House Minority Leader Nancy Pelosi of California vented her displeasure about the prospect of including Social Security and Medicare cuts in any deal, and told him such a package wouldn’t garner support among congressional Democrats.

On Capitol Hill, Boehner and other House leaders held a press conference to reiterate their opposition to tax increases. Still, negotiations continued into Saturday morning July 9, when a round of negotiating among Boehner’s and Obama’s aides yielded little progress in breaking remaining stalemates over details of the tax rewrite and entitlement cuts.

Later that day, Boehner phoned the president at Camp David to tell him he was pulling the plug on a broad deal and would seek a more limited measure.

“Despite good-faith efforts to find common ground, the White House will not pursue a bigger debt-reduction agreement without tax hikes,” Boehner said in a statement after the call.

No Stopgap Deal

Obama was still pressing for a broad agreement. He called a news conference on July 11 in which he ruled out the idea of signing a stopgap debt-limit boost and argued that the time was ripe for a major compromise to reduce the debt, whatever the political difficulties.

“We might as well do it now -- pull off the Band-Aid, eat our peas,” he said.

That didn’t stop Republican resistance. Senate Republican Leader Mitch McConnell of Kentucky proposed a fallback plan on July 12 -- a “last choice” option, he called it -- that would allow Obama to unilaterally raise the debt ceiling $2.4 trillion in installments, requiring that the president lay out the same amount of spending cuts and giving Republicans several opportunities to vote “no.”

At the close of a White House meeting July 13, Cantor pressed Obama about a shorter-term debt measure, prompting a testy response from the usually low-key president.

More Than Reagan

Leaning back from the table, Obama told Cantor that he’d been personally negotiating the details of the debt deal for weeks -- more than Ronald Reagan or George W. Bush would have done -- because he wanted to reach a deal that was important for the country. If Republicans sent him legislation he couldn’t accept, he’d veto it and take it to the American people, Obama said before closing the meeting.

Republicans announced they would move forward the next week with legislation that would slash spending, cap future expenditures, and condition a $2.4 trillion debt-ceiling increase on passage of a balanced budget constitutional amendment. Behind the scenes, though, Boehner and Cantor began serious talks with Obama’s staff on a major compromise.

The House Republicans invited Obama’s chief of staff Bill Daley and Treasury Secretary Timothy Geithner to Boehner’s Capitol office suite on July 15 for a quiet meeting on a framework for a tax overhaul, according to House Republican leadership aides.

Cutting Medicare

Over coffee and bagels at the White House July 17, with Obama popping in periodically to check their progress, the four negotiators, now joined by Lew, moved toward a deal to slash discretionary spending by $1.2 trillion over a decade and set a process for overhauling entitlements and the tax code within six to eight months to save trillions more.

The White House would agree to cut $250 billion from Medicare and trim Social Security benefits through a change in the way their annual increase is calculated. Republicans would agree to a tax rewrite that would raise no more than $800 billion while lowering rates, a number blessed by Geithner, the Republican aides said.

The two sides remained divided over key details, including an enforcement mechanism to ensure the entitlement and tax targets were met. The White House rejected the Republicans’ idea that future borrowing authority be conditioned on achieving the goals, and Republicans opposed Obama’s insistence on raising taxes on high earners while keeping them at the same level for the middle class in the event the promised debt savings didn’t materialize, the aides said.

‘Grand Bargain’

On July 19, as Boehner’s staff awaited a counterproposal from Obama’s aides, Democratic Senator Mark Warner of Virginia and Republican Senator Saxby Chambliss of Georgia, co-leaders of the Gang of Six, stood before about 50 senators in an ornate room on the first floor of the Capitol and pitched their long- awaited “grand bargain.” Obama made a surprise appearance in the White House briefing room to commend the outline, and Treasuries rallied on expectations of a long-term debt-reduction deal.

The president’s team told Boehner’s that their bottom line had changed based on the framework, a message Obama delivered to the speaker in person the next day at the White House, the Republican aides said. An administration official said the senators’ plan had changed the political dynamics in the push for a deal, making it harder to attract Democratic support for a proposal with a smaller revenue increase.

Obama Rebuffed

Still, Obama had no inkling Boehner was abandoning the talks until he began having trouble getting the speaker on the phone and Jackson stopped returning e-mails beginning the evening of July 21. Boehner’s office informed the president on July 22 at about 3:30 p.m. that the speaker would call Obama in two hours. Obama said he wanted to talk to Boehner right then and was rebuffed, administration officials told reporters.

The call came in as scheduled, not long after House Republican leadership aides finished briefing reporters about Boehner’s decision.

“Up until sometime early today when I couldn’t get a phone call returned, my expectation was that Speaker Boehner was going to be willing to go to his caucus and ask them to do the tough thing, but the right thing. I think it has proven difficult for Speaker Boehner,” Obama said at the White House.

“In the end,” Boehner wrote in a letter to Republican lawmakers detailing his decision, “we couldn’t connect.”

--With assistance from Mike Dorning, Kate Andersen Brower and Laura Litvan. Editors: Robin Meszoly, Mark McQuillan

To contact the reporter on this story: Julie Hirschfeld Davis in Washington at Jdavis159@bloomberg.net.

To contact the editor responsible for this story: Mark Silva at msilva@bloomberg.net

July 23, 2011, 1:12 AM EDT
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By Daniel Ten Kate and Nicole Gaouette

(Adds comments from State Department official in sixth paragraph.)

July 23 (Bloomberg) -- U.S. Secretary of State Hillary Clinton warned today that escalating tensions in the South China Sea risk disrupting trade flows and called on Asian countries to clarify territorial claims.

“The United States is concerned that recent incidents in the South China Sea threaten the peace and stability on which the remarkable progress of the Asia-Pacific region has been built,” Clinton told a regional security forum in Bali, Indonesia. “These incidents endanger the safety of life at sea, escalate tensions, undermine freedom of navigation, and pose risks to lawful unimpeded commerce.”

Clinton commended China and the 10-member Association of Southeast Asian Nations for agreeing to guidelines for joint activities in the waters last week and urged them to accelerate a legally binding code of conduct. She called on countries to “exercise self-restraint” and avoid occupying uninhabited islands in the disputed waters.

The U.S.’s alliance with the Philippines and naval power in the Asia-Pacific has led to tensions with China, which claims most of the South China Sea as its own. The Philippines and Vietnam have pushed ahead with oil and gas exploration over objections from China, which has used patrol boats to disrupt hydrocarbon survey activities in disputed waters.

‘Clarify Claims’

Clinton called on the countries “to clarify their claims in the South China Sea in terms consistent with customary international law, including as reflected in the Law of the Sea Convention,” Clinton said, according to prepared remarks that were given to reporters. “Consistent with international law, claims to maritime space in the South China Sea should be derived solely from legitimate claims to land features.”

Clinton is asking states to lay out their claims very clearly and unambiguously and to explain the legal basis for them, said a State Department official present for meetings on the South China Sea. That will force countries to look carefully at their approach, especially given that almost all claims to the waters are exaggerated, the official said, speaking on condition of anonymity.

The U.S. has not ratified the United Nations Law of the Sea Convention.

‘Nine-Dash Map’

China last week rejected an attempt by the Philippines to have the UN’s International Tribunal for the Law of the Sea decide on the territorial dispute. The Philippines plans to ask another UN arbitration panel to demarcate disputed areas of the sea “to prove our claim,” Foreign Secretary Albert F. del Rosario said on July 20.

Along with the Philippines, Vietnam and Indonesia have released statements to the UN saying China’s “nine-dash map” of the waters has no basis in international law.

China says its claims “are supported by abundant historical and legal evidence,” according to an April submission to the UN. It said the Philippines “started to invade and occupy” its islands in the 1970s.

Chinese ships cut survey cables of Vietnam Oil & Gas Group vessels twice in the past few months and in March chased away a boat working for U.K.-based Forum Energy Plc that was surveying the area. A Chinese frigate fired warning shots at Philippine trawlers on Feb. 25.

China’s actions in the waters provoked protests in Hanoi over the past month and prompted a group of Filipino lawmakers to travel last week to the disputed Spratly Islands, which are also claimed by Malaysia, Taiwan, Brunei, Vietnam and China. All those countries except Brunei have troops stationed in the area.

“We believe that it’s important to respect the sovereignty and territorial integrity of China,” Liu Weimin, spokesman for Foreign Minister Yang Jiechi, told reporters yesterday after his meeting with Clinton. “I sense that the U.S. side understands the sensitivities of these issues.”

--Editor: Ben Richardson, Jim McDonald

To contact the reporters on this story: Daniel Ten Kate in Bali at dtenkate@bloomberg.net; Nicole Gaouette in Bali at ngaouette@bloomberg.net

To contact the editor responsible for this story: Paul Tighe at ptighe@bloomberg.net