WASHINGTON (MarketWatch) -- The U.S. Senate removed a key obstacle Thursday to passage of the second half of a $700 billion bank-bailout bill after the House of Representatives approved a measure that would impose conditions on the funds
"We are in uncharted waters when it comes to these issues," said Senate Banking Committee Chairman Christopher Dodd, D-Conn., shortly before the vote, pleading to other lawmakers that they approve the release of the funds. "But to sit and do nothing is not an option."
'We are in uncharted waters...But to sit and do nothing is not an option.'
— Senate Banking Committee Chairman Christopher Dodd
Senators voted 52-42 largely along party lines to oppose a measure known as a resolution of disapproval introduced by Sen. David Vitter, R-La., that would have blocked release of $350 billion in bank bailout money. President-elect Barack Obama made a request for the funds on Monday.
In a statement, Obama praised the Senate for the move, which he says gives him "the authority to implement the rest of the financial rescue plan in a new and responsible way."
Before the bill was rejected, Democrats and Republicans clashed over whether the funds should be allocated.
"The American people had serious questions and concerns the first time around," said Vitter. "The second time, they will go through the roof and say, 'Fool me once shame on you; fool me twice, shame on me.' "
In addition to Vitter, a number of Republicans backed the veto, including Sens. Jim Inhofe, R-Okla., and Jeff Sessions, R-Ala.
A group of House Republicans have launched a similar measure, which may be considered next week.
Sen. Jon Kyl of Arizona was one of the few Republicans to oppose the measure. "We cannot take a chance that we don't have the financial ability to deal with additional crises as they develop," Kyl said.
Expecting that many senators would support the legislation, Democratic leadership received the help of outgoing Sens. Joseph Biden, D-Del., and Hillary Clinton, D-N.Y.
House imposes conditions on the remaining bailout funds
In addition to the vote on the veto, the House on Thursday approved a measure that would impose conditions on the release of the remaining bailout funds, including a provision that would require the Treasury Department spend $50 billion to modify mortgages of troubled borrowers so they can avoid foreclosure. The House will consider whether to attach this measure to the release of the $350 billion next week.
The provision, which was approved 275-152, was introduced by House Financial Services Committee Chairman Barney Frank, D-Mass.
It's unclear whether lawmakers in the Senate will approve the legislation but Frank said he has already received assurances from the incoming Obama administration that the incoming administration will use $50 billion to $100 billion of the remaining bank bailout funds for homeownership relief, including provisions requiring billions to be used to modify mortgages to avoid foreclosures.
In addition to allocating funds for foreclosure relief, Frank's bill would impose new monitoring and executive-compensation requirements on participating banks and auto companies.
Rep. Doris Matsui, D-Calif., introduced an amendment that would send a message to financial institutions receiving bank bailout funds that they should not foreclose on any homeowner until a new loan modification required by the Frank bill is implemented. The provision was approved by a voice vote.
Rep. Patrick Murphy, D-Penn., introduced a measure that would have the Federal Reserve Bank of New York to provide public details about four firms that the Fed chose to operate a program of buying $500 billion of purchases of illiquid mortgage backed securities guaranteed by Fannie Mae and Freddie Mac and Ginnie Mae. It was approved, 426-0.
The provision would force the Fed to disclose details of contracts with investment managers. It would also require to the Fed to disclosure details of any conflicts of interest that the investment managers have.
So far, the New York Fed has bought $10.2 billion in illiquid mortgage-backed securities, according to a statement Jan. 8. "We have been unable to get information related to these contracts," Murphy said.
Rep. Jeb Hensarling, R-Texas, sought unsuccessfully to remove a provision in the legislation that would allow the federal government to place an observer at offices of any participating financial institution. Hensarling argued that even though the option is optional today, it could easily transform into a mandated observer in the not too distant future. "I think this is a terrible precedent, it puts us on a slippery slope to socialism," Hensarling said. The measure failed, 274-151.
Responding, Frank said lawmakers would have to approve new legislation requiring such an observer; however there are no plans for that now.
Legislation introduced by Rep. Michele Bachmann, R-Minn., that would modify a Hope for Homeowners program, which seeks to help borrowers stay in homes, was rejected 282-142.
Ronald D. Orol is a MarketWatch reporter, based in Washington.