By Lori Montgomery and Paul Kane
Washington Post Staff Writers
Saturday, October 4, 2008
With evidence mounting that the nation faces a sharp economic downturn, Congress yesterday gave final approval to what may be the biggest government bailout in American history, authorizing the Bush administration to spend $700 billion to try to thaw frozen credit markets and prevent a deep recession.
Prodded in part by calls from fearful constituents reporting an alarming drop in their ability to borrow money, the House voted by a wide margin to reverse its earlier defeat of the measure and send it on to the White House. Many lawmakers were swayed by revisions to the bill that offer fresh cash for disaster assistance and extend an array of tax breaks for families and businesses worth an additional $107 billion over the next 10 years.
In an unusual display of urgency, President Bush signed the bill less than two hours later, and Treasury Secretary Henry M. Paulson Jr. said he plans to start spending the money within weeks. The measure gives Paulson expansive powers -- unprecedented outside of wartime -- to intervene in financial markets by relieving faltering firms of distressed assets backed by home mortgages, which are falling into foreclosure at record rates.
Experts said the plan might not be enough to offset widening problems with the overall economy. The Dow Jones industrial average dropped 157.47 points yesterday, or 1.5 percent, despite the measure's passage, and gloom lingered over credit markets. The market for short-term credit remained essentially frozen, making it difficult for money-market funds to meet investors' demands and threatening the ability of small businesses, giant corporations, universities and state and local governments to obtain money for day-to-day operations.
Many financial experts warned that the Treasury may soon need to provide short-term financing to companies other than banks.
Meanwhile, there were fresh signs that the credit crisis is taking a toll on the global economy. Yesterday, the Labor Department reported that the nation shed 159,000 jobs in September, the ninth straight month of job loss. In England, the auto industry cut back to a four-day week in response to falling sales. And the leaders of Britain, France, Italy and Germany plan to meet today to discuss the spreading crisis.
In a statement at the White House, Bush praised congressional leaders for quick action on a measure he has described as essential to averting broad economic collapse. "By coming together on this legislation, we have acted boldly to prevent the crisis on Wall Street from becoming a crisis in communities across our country," Bush said before leaving the White House for his Texas ranch.
Bush acknowledged that many people "have concerns about this legislation, especially about the government's role and the bill's cost." He also conceded that the measure is no magic bullet, and that "it will take some time for this legislation to have its full impact on our economy," which "continues to face serious challenges."
Among the measure's benefits, Bush cited a provision critical to attracting support from House Republicans: a new federal insurance program, funded by the banks, that would cover bad assets. The program would require actuaries to set a value for those assets based on historic mortgage failure rates. The firms would then pay a premium for insurance that guarantees a floor value for those assets, permitting them to be bought and sold.
But House Financial Services Committee Chairman Barney Frank (D-Mass.), who led negotiations with Paulson, said yesterday that the insurance program is unlikely to be implemented because it would do little to restore liquidity to cash-starved banks.
"No one expects it ever to materialize, including the Secretary of the Treasury," Frank said.
Rob Collins, a spokesman for Rep. Eric Cantor (R-Va.), the provision's author, retorted: "Barney Frank needs to read the bill. It's mandatory."
Yesterday's vote capped a period of high political drama that roiled financial markets and refocused the presidential campaign on the economy. It began last month when Paulson and Federal Reserve Chairman Ben S. Bernanke summoned congressional leaders to an evening meeting in the Capitol to warn of an impending meltdown in global financial markets. Paulson sent Congress a three-page request for $700 billion two weeks ago.
The measure has since grown to more than 400 pages. Formally labeled the Emergency Economic Stabilization Act, it gives Paulson wide latitude to purchase any assets from any firms at any price -- essentially deciding which companies will be rescued and which will be left to founder. Treasury officials have said they plan to conduct reverse auctions, where firms compete to offer assets at the lowest price.
The largest banks, including Bank of America, J.P. Morgan Chase, Citigroup and Wells Fargo, own a big share of the mortgage-related securities the Treasury intends to buy. Much of what they own they acquired in deals for companies that didn't last long enough to be helped by the bailout, such as Washington Mutual and Wachovia.
The money will be released in segments, with $250 billion available immediately and another $100 billion released upon White House certification that it is necessary. Congress will be given 15 days to object before Paulson -- or his successor -- receives the other half.
It is unclear how the program will impact the federal deficit, which is already approaching record levels. Because the money will be used to purchase assets that theoretically can be sold for a profit, the nonpartisan Congressional Budget Office has concluded that it was impossible to judge the program's cost.
What is clear is that the Treasury will have to borrow the money: The bill increases the legal debt limit by $700 billion, to $11.3 trillion.
Lawmakers demanded a variety of provisions to protect taxpayers. Firms that take federal cash must give the government warrants to buy stock so that taxpayers benefit if the firms return to profitability. And if the program is in the red after five years, the measure requires the president to offer a plan for recovering the outstanding balance from the financial services industry.
Lawmakers insisted on strict oversight of the program, including an independent inspector general and a powerful oversight board staffed by the Treasury and housing secretaries, the chairman of the Federal Reserve and other federal regulators.
The measure also limits paychecks for senior executives at firms participating in the program. Treasury may ban excessive salaries and bonuses, as well as multimillion-dollar severance packages known as "golden parachutes," for executives at firms that receive direct infusions of federal cash. Companies that sell damaged assets in the auctions also will be targeted: They will lose tax deductions if salaries for their top executives exceed $500,000 a year, and outgoing managers who take severance packages triple their annual salaries will be required to pay a 20 percent excise tax.
On Monday, the House narrowly rejected the measure, 228 to 205, stunning the White House and sending the Dow plummeting 7 percent. The Senate revived it Wednesday, adding provisions to appeal to reluctant House members, including a temporary increase in federal insurance for bank deposits that raised the cap to $250,000 from $100,000.
The Senate also tacked on a separate measure that extends or renews dozens of existing tax breaks for businesses and consumers, including a provision to prevent the alternative minimum tax from adding thousands of dollars to the tax bills of more than 20 million households next April. The addition of the tax package, which will add more than $100 billion to next year's budget deficit, angered some fiscal conservatives in the House. But the changes appealed to many others and set the stage for yesterday's victory.
Compared with Monday, the measure won 58 additional votes -- 26 more Republicans and 32 more Democrats. After initially rejecting the bill by a 2-to-1 margin, House Republicans mustered 91 yes votes on the second try, while 172 Democrats supported passage. Voting no were 108 Republicans and 63 Democrats.
Sen. Barack Obama's outspoken support for the package proved critical. The influence of the Democratic presidential nominee, who spent the week dialing no voters, was cited by five vote-switching freshmen as a key motivator. Obama was particularly successful in persuading members of the Congressional Black Caucus, which was deeply divided Monday. Yesterday, 13 black caucus members switched to vote for the measure.
"What helped me is Barack Obama, who called and said 'We really do have to do this,' " said Rep. Elijah E. Cummings (D-Md.), adding that Obama promised to do more to help homeowners at risk of foreclosure if elected president.
On the Republican side, House Minority Leader John A. Boehner (R-Ohio) pulled in votes from allies such as Judy Biggert (Ill.) and Pat Tiberi (Ohio). The Republican presidential candidate, Sen. John McCain (Ariz.), also worked the phones, but none of the GOP vote switchers interviewed yesterday cited him as a major factor.
Rep. Joe Knollenberg (R-Mich.) said he decided to vote "yes" after receiving calls from the chief executives of all three Detroit automakers; a bevy of bankers; and Paulson, who called just before the vote.
"A lot of people have begun to change their minds because they can see the heartbreak out on the streets," Knollenberg said, citing reports of potential car buyers being denied loans in recent days.
At 1:23 p.m., as the electronic boards in the chamber showed the vote tally passing 218, the House gallery burst into applause. Within minutes, Bush was on the phone, offering thanks to House Speaker Nancy Pelosi (D-Calif.) and House Majority Leader Steny H. Hoyer (D-Md.). Half an hour later, an aide passed Frank a note to say that Bush was trying to reach him as well.
Afterward, the House adjourned for the November elections. But Pelosi said Congress would have more to say soon about the meltdown on Wall Street.
Rep. Henry A. Waxman (D-Calif.), chairman of the Committee on Oversight and Government Reform, will open hearings next week into the federal bailout of insurance giant American International Group and Lehman Brothers's bankruptcy filing. And when Congress convenes in January, Frank said he plans to rewrite housing finance laws, broaden executive pay limits to more corporations and pursue new regulations to rein in excessive risk-taking on Wall Street.
"Our capacity to generate risk has outstripped our ability to contain it effectively," Frank said. "It would be highly irresponsible, a betrayal of our oath, if we were to stop here."
Staff writers Steven Mufson and Binyamin Appelbaum contributed to this report.