ECONOMICS AND TRADE | Achieving growth through open markets
02 October 2008
U.S. Senate Endorses Financial Rescue Plan
Senators sweeten the package to sway reluctant House members
Washington — The U.S. Senate approved a revised version of the $700 billion plan to shore up the U.S. and global financial systems, reviving hope that the measure will be passed by the other congressional chamber, which rejected the plan days earlier.
Senators voted overwhelmingly October 1 in favor of the bill. It is designed to prevent further bankruptcies of U.S. and foreign financial institutions jeopardized by the fallout from the U.S. mortgage crisis and to bring back confidence to the credit markets, which have practically frozen up in recent days.
President Bush said the plan is “essential to the financial security of every American.”
“The American people expect — and our economy demands — that the House pass this good bill this week and send it to my desk,” Bush said.
On September 29, the House of Representatives rejected the initial version of the plan by a slim margin.
For the bill to become law, both the House and Senate must pass the same version of it, and the president must sign it. The House is expected to vote on the Senate-approved bill October 3, and leaders of both parties expressed guarded optimism about the chances of its passage.
The Dow Jones Industrial Average stock index fell 778 points, or close to 7 percent, on the day the House rejected the bill. Although the average regained some ground the next day, it did not return to its previous level.
Congressional representatives trying to gauge voters’ opinion have had difficulty. The week of September 22, most calls and e-mails from voters expressed anger about what they perceived as an attempt to rescue greedy and irresponsible Wall Street companies and officials; the week of September 29, the number of messages criticizing House members for failing to pass the rescue plan significantly increased.
Senate Banking Committee Chairman Christopher Dodd, a Democrat, acknowledged that “many Americans are confused and angry about this crisis.” But he reassured them that, ultimately, the plan will work to their advantage.
Dodd, who played a key role in pushing the legislation through the Senate, said that it “not only [will] provide stability and confidence to our financial markets, but also will help American families who are struggling to make ends meet.”
The stock market plunge and change in constituents’ sentiments, plus new provisions in the Senate version of the rescue bill, may persuade House members who earlier voted “no” to change their minds, according to congressional observers.
Also important is the fact that leaders and central bankers in industrialized countries and emerging markets, surprised by the degree of their countries’ exposure to the U.S. financial crisis, have been calling on Washington to do whatever is necessary to prevent a global financial meltdown.
Some lawmakers and private-sector economists caution against expectations that the package will resolve all problems in the financial markets and bring the U.S. economy out of its doldrums soon. Senator Judd Gregg of New Hampshire, the ranking Republican on the Senate Budget Committee, said: “We are in for a difficult economy for a considerable period of time. [Some] institutions will not survive this economic situation.”
But he added that “not doing anything at this time is to virtually guarantee that we, as an economy, will begin a very significant downturn of disproportionate impact on people on Main Street.”
SENATE-STYLE BAILOUT
The provisions added by Senate include a temporary increase (from $100,000 to $250,000) of the cap on bank deposits guaranteed by the government and a package of tax cuts, including a small tax relief measure for some homeowners, earlier rejected by the House.
The bill calls for the government to act as the buyer of last resort for home mortgages and so-called toxic securities held by struggling institutions, including some foreign banks, and as a provider of fresh capital to financial institutions whose failure could jeopardize the financial system. Mortgage-backed and other securities lost much of their value as hundreds of thousands of Americans defaulted on their home loans. (See “Government Rescues Two Biggest Mortgage Companies.”)
The drafters of the original plan put together by the Treasury Department — with support from the Federal Reserve, the U.S. central bank — hope to jump-start credit markets so securities’ prices will rise and private investors will feel confident enough to re-enter the market.
The plan — in its original and its latest form — contains several options for the government to recoup the money used to finance the plan and possibly earn a profit. If, after five years from the bill’s enactment, the government determines that the program has lost money, it would ask the financial industry to cover the projected shortfall.
As a result, a congressional research arm estimates that the “net cost [to the government] is likely to be substantially less than $700 billion.”
During the negotiations with congressional leaders, the three-page proposal submitted by Treasury Secretary Henry Paulson grew to more than 100 pages of legislation, which included oversight provisions, taxpayer protection, help for homeowners struggling with debt and other provisions reflecting lawmakers’ many reservations about the plan, its effectiveness and its cost to the taxpayers. The version passed by the Senate is more than 400 pages.
A summary of the Senate bill, an analysis of it and the complete text (each is a PDF file) are available on the Senate Banking Committee Web site.
