By Jason Simpkins
The U.S. Senate last night (Wednesday) passed a $700 billion banking-sector bailout package, and will now watch as the House of Representatives reviews the inducement-laden pact. The House rejected an earlier version of this bill on Monday.
The legislation, approved by a 74-25 vote, authorizes the federal government to buy problem financial assets from banks and other financial institutions that have been squeezed by a credit crunch that stems from a burst housing bubble that's led to record home foreclosures. The new bill contains two political "sweeteners" that were included to get the House to reverse its earlier opposition to this plan: The first raises the limit on federal bank-deposit insurance; and the second underscores the authority of U.S. securities regulators to suspend asset-valuing rules that corporate executives blame for fueling the crisis.
Many analysts anticipate this bill will pass after the Dow Jones Industrial Average's 778-point drop Monday provided very tangible evidence of the precariousness of the U.S. economy. The Senate vote didn't start until after 7:30 p.m. EDT, last night. The hope is that the House of Representatives will then be ready to take action on this new bailout bill version on Friday, Bloomberg News reported.
"The big drop [in the Dow Index] really had a chilling effect on a lot of our members and a lot of their constituents," House Republican Leader John Boehner, R-Ohio, told Fox News. With changes made by the Senate, the legislation "has a much better chance" of passage this time, he said.
In addition to a dramatic increase in public support, the amendments added to the bill the House rejected in an attempt to capture the support of skeptical Republicans, Congressional spokesman Kevin Smith told MarketWatch.com.
"We think we'll have a better shot at passing this bill than we did on Monday," said Smith, who is a spokesman for Boehner. "The bill has continued to get better from our standpoint."
Officially called the Emergency Economic Stabilization Act of 2008, the revamped Senate bailout bill adheres to the core fix-it plan developed by U.S. Treasury Secretary Henry M. "Hank" Paulson Jr. and U.S. Reserve Chairman Ben Bernanke, a proposal that called for the federal government buy and hold so-called "toxic" mortgage assets, thereby freeing up funds for banks to begin lending again. It gives Paulson the $700 billion in phases, with $250 billion up front, another $100 billion pending presidential approval. The final outlay of $350 billion required Congressional approval.
However, the Senate package contains the following new measures that weren't part of the House bill that was slapped aside with the help of House Republicans on Monday:
- An increase in the Federal Deposit Insurance Corp. (FDIC) deposit-insurance cap, boosting the level of government-guaranteed deposits 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 the 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.
- The Senate bill also reiterates the U.S. Securities and Exchange Commission's authority to suspend the so-called "fair-value accounting standard," which requires companies to review assets and report losses if their values decline. Lawmakers, the American Bankers Association, and companies that include American International Group Inc. (AIG), have urged the SEC to suspend or ease the rule, saying it forces firms to report deeper losses than needed on assets such as subprime mortgages, Bloomberg said.
Some Dems Won't be Budged
Of course, while the chances for a House approval have increased with the new provisions, there's still no guarantee – and there are some hardliners who refuse to be swayed.
"The bill that they are going to send back is the same bill that I voted against two days ago," Rep. Joe Barton, R-Tex., said in an interview with Bloomberg Television. "Why would I turn around and vote for it?"
Also some analysts argue that the sweeteners meant to appease House Republicans could turn off House Democrats, as many of the tax breaks being offered – especially the suspension of the AMT – are not fully offset by other tax revenue, meaning they are almost certain to boost the federal deficit.
Fiscally conservative Democrats, often called Blue Dogs, could be scared off by generous tax breaks being tacked on to an already extravagant bill.
"We're going to have to be talking to them," House Majority Leader Steny Hoyer, D-Md., told NBC's The Today Show. "I'm not particularly pleased with that addition [to the bill] myself, very frankly."
While House Republicans made up the majority of opposition to the bailout on Monday – with two-thirds voting ‘Nay' – roughly 40% of the House Democrats also voted against the bill, helping ensure its defeat.
Monday Morning Quarterbacks
The original bailout plan was shot down in the House of Representatives by a vote of 228-205, after House Republicans slammed the legislation as a Wall Street bailout financed by the U.S. taxpayer.
Ahead of that vote, a great number of representatives had reportedly been overwhelmed with calls from their constituents, irate over the notion that the Wall Street firms that treated the economy with such a selfish disregard and a reckless abandon would be spared from failure by taxpayer dollars.
However, when the bill died on the floor of the House Monday, there was no legitimate alternative standing by to restore functionality to the credit markets and save the U.S. economy from potentially stalling and diving into a severe recession. That was reflected by U.S. stock indices, which spiraled uncontrollably downward.
The benchmark Dow suffered its biggest-ever one-day point loss, plunging 777.68 points on Monday, and shedding and losing 7% of its value. The broader Standard & Poor's 500 Index skidded 106.59 points, or 8.79%, and the tech-laden Nasdaq Composite Index plummeted 199.61 points, or 9.14%.
The collapse resonated throughout the country, and suddenly, a new wave of phone calls and letters came pouring into Washington – this time imploring policymakers to take action by approving legislation. E-mail traffic was so dense that it reportedly stalled Congressional computers.
"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."
Lobbyist also ramped up their efforts, petitioning Congress with an open letter from a coalition of 56 different trade groups. These groups ranged from the U.S. Chamber of Commerce and the to the National Roofing Contractors Association and the American Meat Institute.
Failure is not an Option
The consequences for the U.S. economy, should the bill fail again, could be catastrophic.
When asked by Sen. Christopher Dodd, D-Conn., about the possible consequences of the bailout being rejected, U.S. Federal Reserve Chairman Ben S. Bernanke responded by saying that the financial markets are in a "fragile condition," underscoring that "absent a plan they will get worse."
Most of the time, it's a softening economy that causes the credit markets to go sour. Unfortunately, this time around, the economic downturn is unfolding in precisely the opposite manner: The credit crisis is creating a liquidity shortage, meaning banks can't (or won't) lend, businesses can't grow, and jobs can't be created. Ultimately, the economy will start to shrink, causing a recession that hammers corporate profits, torpedos consumer confidence, sends the stock market into a nosedive, and induces a major uptick in U.S. unemployment.
And because the credit problems are so deep, these problems could take years – not months – to unwind and resolve.
That's why it's best to fix these problems now, Bernanke contends.
"I believe," Bernanke said, "if the credit markets are not functioning, that jobs will be lost, that our credit rate will rise, more houses will be foreclosed upon, GDP will contract, that the economy will just not be able to recover in a normal, healthy way."
U.S. economic growth slowed to just 2.8% in the second quarter, down from the 3.3% originally reported. And even that modest growth was bolstered by blistering exports – which will no doubt slow in coming months as the global economy cools – and one final push from the U.S. government stimulus checks stemming from the earlier Bush administration tax cut.
Consumer spending increased in May and June, thanks to the billions of dollars in payments sent to American taxpayers as part of the Economic Stimulus Act of 2008, but plateaued in August as the effects of those payments subsided.
Any hope that the holiday season would rejuvenate American consumers was dashed by the National Retail Federation, which last week forecast a scant 2.2% increase in end-of-year retail purchases – the slowest rate of growth in six years.
Unemployment is also on the rise, as an average of 466,000 Americans filed first-time jobless claims, up from 443,000 in August and 363,000 in the first six months of 2008.
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Exports, which contributed 2.9 percentage points to second-quarter growth, won't be much of a help going forward, either, as orders from overseas markets are beginning to falter. The Institute of Supply Management's export gauge fell from 57 in August to 52 in September, and worse, the group's factory index slumped to 43.5, its lowest level since October 2001, from 49.9 in August. All these figures are indicative of a severe drop in manufacturing.
News and Related Story Links:
Senate Sets Bank-Rescue Vote, House May Act Friday.
Economic Stimulus Act of 2008.
alternative minimum tax.
Dismal Holiday Shopping Season Holds Little Relief for the U.S. Economy.
Blue Dog Coalition.
Rescue plan appears headed for passage in Senate.
Bailout Bill Sent Back to House After Senate Passage.