By William Patalon III
And Jason Simpkins
Money Morning Editors
The U.S. Senate plans to vote tonight (Wednesday) on a $700 billion banking-bailout plan, using an increase in bank-deposit-insurance limits and tax breaks for consumers and businesses as devices to win support from the Republicans who sent a House bill down to defeat on Monday.
With its evening bailout vote, the Senate is widely expected to pass the bill – with broad-based backing from Democrats and Republicans alike. Insiders also expect the House will back the new bill, thanks to a swing in voter sentiment and pressure from foreign governments and central banks to restore public confidence in the U.S. banking system.
All last week, through last weekend and even up into Monday, Congressional representatives have received a flood of phone calls, e-mails and faxes from livid voters who resented the fact that Wall Street was going to get a taxpayer-financed bailout for a problem that these financial institutions had actually caused.
But that sentiment shifted quickly after the House of Representatives bailout vote on Monday, in which that chamber’s lawmakers rejected the financing proposal and left the country with no immediate alternative. The uncertainty that created spilled over in the U.S. stock market, with the Dow Jones Industrial Average enduring its worst one-day point drop ever – a plunge of nearly 778 points that left investors both dazed – and scared.
“More than $1 trillion worth of market value was wiped off the books by the stock market drop,” U.S. Sen. Robert Bennett, R-Utah, told Bloomberg News. “It is ordinary people looking at ordinary pensions, with their ordinary Main Street kind of 401(k) plans, who lost that $1 trillion. And they lost it in a matter of minutes.”
Stocks soared yesterday (Tuesday) – with the Dow gaining 485 points in posting its third-biggest point gain ever – as investors regained confidence that Washington would bring a new plan back to the table for consideration. The Senate announced last night that it would be bringing a new measure to vote tonight.
To boost the odds of success with its own bailout vote, the Senate is including measures that are almost certain to resonate with both voters and lawmakers – especially lawmakers focused on the upcoming election. Key new measures in the Senate bailout bill include:
- An increase in the Federal Deposit Insurance Corp. (FDIC) deposit-insurance cap, from the current $100,000 to the new level of $250,000.
- A one-year “patch,” or relief from the alternative minimum tax, or AMT, which is expected to save about 24 million households a combined $62 billion.
- Optional insurance for mortgage-backed securities, with financial institutions paying premiums.
- A “Mental Health Parity” provision that provides insurance for mental illness.
- Roughly $17 billion in tax credits for the development of renewable energy such as wind and solar power.
- An extension of tax breaks that would save individuals and corporations roughly $150 billion over the next 10 years, as well as tax breaks for those impacted by natural disasters.
Both Republican presidential nominee John McCain and Democratic rival Barack Obama endorsed the FDIC change, The Boston Globe reported. Both presidential candidates had proposed such a change be part of any bailout plan, and both were planning to return to Washington for tonight's vote, their aides said.
Indeed, billionaire and hedge-fund manager T. Boone Pickens believes in the bailout,that Congress had to make an increase in the FDIC-insurance levels part of any proposal, The Detroit Free Press reported in its online edition, freep.com.
“People have to know they are not going to lose money if they have it in banks,” Pickens told the Free Press earlier this week. “We need to bump that up.”
Pickens was in Ann Arbor today to talk about his energy plan, and spoke to the Detroit newspaper in advance of that visit. He said the bailout absolutely has to be done.
The Senate agreed to vote on the legislation along with the measure temporarily raising the limit on federal deposit insurance to $250,000 from $100,000. That increase was proposed by Republicans critical of the original compromise plan that authorized U.S. Treasury Secretary Henry M. “Hank” Paulson Jr. to buy troubled debt from lenders.
The House rejected that plan on Monday. Two-thirds of House Republicans and 40% of Democrats defeated the bailout plan on a 228-205 vote. At the time, President George W. Bush and Senate leaders vowed to bring a new version of the pact up for a vote later in the week.
Many observers say that passage of the bill by the Senate will induce House members to take a very serious new look at the bill. A dozen ‘No’ votes would need to be changed to ‘Aye’ votes for the rescue legislation to pass in the House, Bloomberg reported.
Pressure is mounting from overseas, too. European Central Bank President Jean-Claude Trichet said U.S. lawmakers must pass the measure to shore up confidence in the global financial system. European governments have helped rescue at least five banks since Sept. 28, with Trichet taking part in talks to save Belgium's Fortis NV over the weekend.
“It has to go, for the sake of the U.S. and for the sake of global finance,” Trichet told Bloomberg Television in an interview from Frankfurt late yesterday. “I am confident, but of course it is the decision of the U.S. Congress.”
News and Related Story Links:
Senate plans bailout vote on Wednesday.
The Wall Street Journal:
Raising FDIC Savings Cap to $250,000 Gains Support.
Alternative Minimum Tax.
Senate Sets Bailout Vote, Boost to Deposit Insurance.
Money Morning Market Analysis:
Credit Crisis Update: U.S. Stocks Notch Record Gains on Investor Hopes for a New Bailout Plan.
Money Morning Market Analysis:
Surprise Rejection of Bailout Deal Causes Record Decline in U.S. Stocks, Paves the Way for a Better Accord.
Money Morning Analysis:
Wind Power: Pickens Lobbies, While China Acts
Money Morning Market Analysis:
Credit Crisis Update: Foreign Stocks Dive Monday on Trio of European Bank Bailouts.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.