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On the Issues
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Emergency Economic Stabilization Act
The extraordinary events in our financial markets have resulted in extensive government intervention in the private sector over the past year. The Emergency Economic Stabilization Act, passed on October 3, 2008, seeks to stabilize markets and re-start the flow of credit, a vital component of our nation's economic health. A summary of the events and legislation and some frequently asked questions are provided below, along with a number of links to key official documents.
How we got hereOur financial markets are experiencing a once-in-a-lifetime event, the full consequences of which are just now unfolding. Short-term credit for borrowers is unavailable or prohibitively expensive. The balance sheets of banks include illiquid assets of questionable value. Equity prices have fallen, and even the safety of money market funds has been called into question. Unable to meet their contractual commitments to creditors, a number of prominent financial institutions have failed or required significant federal assistance. A confluence of factors has contributed to the current credit crisis, including irresponsible actions by financial institutions, excessive borrowing, a severe decline in the housing market, and the inadequacy of our depression-era financial regulatory structure. In the years leading up to 2007, lenders in the competitive mortgage finance business increasingly sought to maximize profits by extending mortgages to borrowers that were less and less credit worthy. Through the securitization process, new mortgages were packaged and sold to investors in the form of mortgage-backed securities. As delinquencies and foreclosures increased, the mortgage-backed securities lost value. The interconnectedness of financial institutions and the uncertainty of who holds the ultimate risk with respect to these asset-backed securities have discouraged potential buyers, undermined investor confidence, and increased market volatility. The result has been the dissolution, acquisition, or federal takeover of several large financial firms. Your government's responseIn order to restore liquidity and stability to the financial system, I supported the passage and enactment of the Emergency Economic Stabilization Act (P.L. 110-343), which the President signed into law on October 3, 2008. This was the most recent of series of aggressive actions that began with the government's intervention in Bear Stearns' collapse in March of this year and continued with the nationalization of Fannie Mae and Freddie Mac over the summer. I supported the federal financial rescue package because the health of the financial system affects every American - even those without bank accounts, credit cards, or loans. Small and large businesses rely on the credit markets to run their companies and pay their employees. If the credit markets dry up, businesses who need credit have to close and employees lose their jobs. Moreover, many workers rely on the markets for their retirement security and for the financing of their homes, their cars and their children's college tuition. The Administration's original $700 billion proposal, however, was insufficient. In fact, it was only three pages in length, and if Congress had passed the President's blank check proposal without changes, it would have committed legislative malpractice. Unlike the original proposal, the enacted version seeks to: (1) hold Wall Street accountable by prohibiting excessive compensation and severance packages for top executives; (2) preserve homeownership and mitigate additional home foreclosures; and (3) protect the interests of taxpayers through aggressive oversight and measures that increase the likelihood that taxpayers will be repaid. The legislation authorizes the U.S. Department of the Treasury to establish the Troubled Asset Relief Program (TARP) to buy mortgage-backed securities and other distressed financial assets. The EESA also authorizes the Treasury Department to invest capital directly in financial institutions, which has become a crucial part of a coordinated global effort to shore up undercapitalized banks. On October 14, 2008, Secretary Paulson announced that the first $250 billion tranche in the $700 billion rescue fund will be used to recapitalize the financial sector by purchasing nonvoting preferred stock in banks and thrifts. The Treasury plan, which was not a focus of the original proposal, is a critical step in the effort to reopen and stabilize credit markets and will complement the actions taken by our European trading partners. Finally, going forward, I am particularly pleased that the financial rescue plan includes a modified version of a proposal I introduced with Senator Maria Cantwell (D-WA) to jump-start the fundamental reform of our financial regulatory structure. Our proposal was introduced in the Financial Market Investigation, Oversight, and Reform Act (S. 3652). This enacted provision establishes a bipartisan oversight panel consisting of five private sector representatives appointed by congressional leaders. The panel is charged with conducting a comprehensive review of the financial regulatory system and reporting back to Congress in approximately four months with specific recommendations on how to overhaul and modernize our financial regulatory structure to prevent credit and liquidity crises from occurring in the future. The current regulatory regime was constructed in the aftermath of the Great Depression, and it desperately needs reexamination and reform in order to prevent a repeat of the current crisis. We must take steps to ensure that we never again find ourselves in the same position - where Main Street taxpayers are bailing out Wall Street financial institutions. When Congress reconvenes, both the House and Senate will get to work on reforming and modifying our financial regulatory structure to prevent future crises. Fundamental financial reform will require Congress to come together in a bipartisan fashion and confront a number of vested interests that benefit from the current rules. Please be assured that I will closely monitor the Treasury Department's implementation of the financial rescue plan and will continue my efforts to forge a bipartisan solution to this economic crisis.
Frequently Asked QuestionsQ. Why does the government need to use government funds to prop up private sector banks?
Q. Is this program going to bail out wealthy Wall St. bankers and waste taxpayer dollars?
Q. Are there measures that are designed to directly assist homeowners facing foreclosure? Section 109. Foreclosure Mitigation Efforts. For mortgages and mortgage-backed securities acquired through TARP, the Secretary must implement a plan to mitigate foreclosures and to encourage servicers of mortgages to modify loans through Hope for Homeowners and other programs. This program allows the Secretary to use loan guarantees and credit enhancement to avoid foreclosures. It also requires the Secretary to coordinate with other federal entities that hold troubled assets in order to identify opportunities to modify loans, considering net present value to the taxpayer. Section 110. Assistance to Homeowners. This section of the law requires federal entities that hold mortgages and mortgage-backed securities, including the Federal Housing Finance Agency, the FDIC, and the Federal Reserve to develop plans to minimize foreclosures. It also requires federal entities to work with servicers to encourage loan modifications. Section 124. Hope for Homeowners Amendments. This language strengthens the new Hope for Homeowners program to expand homeowner eligibility and improve the tools available to prevent foreclosures.
Q. What is Congress doing to make sure that our system is better protected in the future? Key DocumentsText and summaries of legislation Click here for the full text of the Emergency Economic Stabilization Act Senator Lieberman's Comments on the Economic Crisis Click here to read Senator Lieberman's statement about the passage of the Emergency Economic Stabilization Act. Advice and information from Senator Lieberman and other US Government Agencies Click here for Senator Lieberman's Mortgage Assistance Tip Sheet.Click here for the official US Government website detailing the economic recovery. Click here for details on Fannie Mae and Freddie Mac's new loan modification plan. Click here for US Treasury Department's Money Market Fund Guarantee Program. Click here for the US Treasury Department's Emergency Economic Stabilization Act information page. Click here to see what the US Securities and Exchange Commission has been doing to address the financial crisis. Click here to see what changes the FDIC has made to ensure your money is secure in banks across the United States. Congressional testimony and speeches from government officials Click here to read a speech given by the Chairman of the Securities and Exchange Commission, Christopher Cox, regarding the credit crisis and regulatory reform.Click here for Federal Reserve Chairman Ben Bernanke's testimony to the House Committee on the Budget. Click here for Former Federal Reserve Chairman Alan Greenspan's testimony to the House Committee on Government Oversight and Reform. Click here for Federal Reserve Governor Elizabeth Duke's testimony to the Senate Committee on Banking, Housing, and Urban Affairs. Click here for information on a Senate Committee on Banking, Housing, and Urban Affairs hearing entitled "Turmoil in the U.S. Credit Markets: The Genesis of the Current Economic Crisis" which occured on October 16, 2008.
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