By Lori Montgomery and Paul Kane
Washington Post Staff Writers
Friday, January 16, 2009
The Senate voted yesterday to release the second half of the Treasury's hugely unpopular initiative to stabilize the fragile U.S. financial system, granting President-elect Barack Obama virtually unfettered authority to spend $350 billion to revive sluggish credit markets and help millions of homeowners avoid foreclosure.
Within hours, the Treasury Department announced it would tap those funds to launch a dramatic new bailout of Bank of America that involves investing billions more in the company and guaranteeing $118 billion in troubled assets. [See story, page D1.]
With the financial crisis threatening anew to further depress the economy, the Democratic Congress was moving rapidly to give Obama the tools he has requested to try to ease the effects of a recession that many economists predict will be the deepest, longest and most dangerous since the Great Depression. Before yesterday's Senate vote, House leaders unveiled an $825 billion package of tax cuts and new spending directed at Obama's goal of saving or creating more than three million jobs over the next two years. [See story on page A9.]
Top Obama officials say both initiatives are critical to turning the economy around: The spending package seeks to stimulate spending by showering cash on consumers, local governments and businesses. The bailout program, meanwhile, attempts to forestall trouble in the financial system, where risky lending practices helped spark the recession in the first place.
In an interview with Washington Post reporters and editors, Obama stressed the "rickety nature" of the financial system.
"We can't just spend our way out of the problem. At some point credit has to flow effectively," he said. He added that "banks now are fully caught up in a downward spiral where they have now affected the real economy, the real economy is now affecting their balance sheets. And so we're going to have to intelligently and strategically infuse some additional capital into the financial system."
Obama praised lawmakers for their quick response to the crisis and thanked senators for helping him score an important victory in the first test of his administration's ability to forge consensus. The Senate voted 52 to 42 to defeat a resolution that would have blocked the second installment of the $700 billion financial rescue program, guaranteeing that the money will flow to the Treasury soon after Obama takes office Tuesday.
The House may vote on a similar measure next week, but its defeat in the Senate makes that effort largely symbolic.
Obama acknowledged that it "wasn't an easy vote" for many senators "because of the frustration so many of us share" over how the Bush administration managed the first half of the rescue fund, known as the Troubled Asset Relief Program, or TARP.
"Restoring the economy requires that we maintain the flow of credit to families and businesses," Obama said in a statement. "So I'm gratified that a majority of the U.S. Senate, both Democrats and Republicans, voted today to give me the authority to implement the rest of the financial rescue plan in a new and responsible way."
Lawmakers, pressured by the Bush administration to approve the rescue in October amid warnings of an imminent global financial meltdown, have been furious about the program's implementation -- along with many of their constituents. By one count, Sen. Sam Brownback (R-Kan.) said his office had received 44 calls in favor of the program and 2,000 calls against. "Kansans were hot and mad and upset and strongly opposed," he said during yesterday's debate.
The Treasury has already committed the first $350 billion. During Senate debate, Republicans and Democrats alike said they had been misled by Treasury Secretary Henry M. Paulson Jr., who told them he would use the money to buy "toxic" assets backed by failing mortgages but instead used it to infuse cash into large banks. They complained that Paulson also did little to help distressed homeowners renegotiate mortgages that are defaulting at historic rates.
Obama has offered to address some of those criticisms. In a personal pitch to Democratic senators this week and in two letters sent to lawmakers by his top economic adviser, Lawrence H. Summers, Obama has pledged to focus the rest of the TARP funds on homeowners and credit markets, and to bolster oversight of companies participating in the program.
In the latest letter, transmitted hours before yesterday's vote, Summers pledged to advise Congress before making any "substantial new commitment of funds," to quickly disclose the details of any purchase of stock or assets and to force financial firms that accept the money to limit executive salaries and prove they are using it to increase lending.
Summers also vowed to dedicate $50 billion to $100 billion to a "sweeping effort" to reduce foreclosures. And he assured lawmakers that Obama "has no intention of using any funds to implement an industrial policy," a reference to the concerns of many Republicans that the money would be used to prop up the failing auto industry, which has been awarded a small share of the funds.
Backed by an aggressive lobbying campaign that involved personal calls from Obama to dozens of skeptical lawmakers, that message largely met with approval from Senate Democrats. He won over four senators, including Debbie Stabenow (Mich.) and Mary Landrieu (La.), who voted against the bailout program in October. And he persuaded seven of the eight Democratic freshmen -- most of whom blasted the bailout while running for office -- to support him.
"I feel like they've given me a lot of commitment on the housing front," said Sen. Mark Begich (D-Alaska), who along with the other newcomers received a private briefing from Summers this week.
But Obama was less successful among Republicans, who abandoned the rescue effort in droves, and the vote marked a starkly partisan start to his presidency. While 34 Senate Republicans voted to create the program, only six voted to release to Obama the rest of the money, joining 46 Democrats.
Minority Leader Mitch McConnell (R-Ky.), who voted to create the rescue program and then faced five weeks of commercials from his opponent blasting that decision, waited until the fate of the measure was determined before casting a vote against Obama. He cited the last-minute letter from Summers, which included a pledge to change bankruptcy laws to help homeowners renegotiate their mortgages, a proposal opposed by many Republicans.
"I appreciate the incoming administration's assurance in that letter to use these funds for the original purpose of stabilizing the economy and preventing a systemic economic collapse," McConnell said in a statement. "However, the incoming administration also indicated it would use the money in ways I cannot support."
Sen. John McCain (R-Ariz.), who briefly suspended his presidential campaign to help negotiate the creation of TARP, also voted against releasing the money.
Sen. Charles E. Schumer (D-N.Y.) said two factors boosted the vote total: A renewed "sense of crisis" stemming from new disclosures about the extent of the troubles at Bank of America and "faith in Obama to do the right thing."
Staff writer David Cho contributed to this report.