The House of Representatives today rejected a plan to borrow up to $700 billion to buy "toxic" assets from banks and financial institutions, with opponents deriding the plan as a taxpayer-funded bailout of Wall Street.
After a passionate three-hour debate in which supporters of the bill warned of the dire consequences of inaction, House lawmakers voted 228-205 against legislation that was intended to mollify critics of the Bush administration’s original plan.
Stocks plunged after the vote, as investors reacted to the reluctance by lawmakers to intervene in the credit crunch.
The Treasury Department issued a statement saying it would use "all the tools at our disposal, as we have over the last several months, to protect our financial markets and our economy."
The vote was a rejection of a compromise effort by House leaders over the weekend to craft legislation that would have allowed the Bush administration to move forward with a plan put forward Sept. 20, but with additional oversight, protections for taxpayers, and help for troubled borrowers.
House leaders said they would return to the negotiating table and come up with another bill that could pass muster with Congress. But congressional critics said they wanted the government to implement measures that could unfreeze credit markets without putting taxpayers at risk.
Those measures could include changing accounting rules that require banks and financial institutions to "mark to market" the value of troubled assets like mortgage-backed securities, which limits their ability to make new loans, and raising the limits on Federal Deposit Insurance Corp. insurance to encourage people to leave their savings with banks.
In a development unrelated to today’s vote, the FDIC helped facilitate the sale of Wachovia Corp. to Citigroup Inc., and the Federal Reserve and central banks around the world provided billions in liquidity in the form of short-term loans and swap lines (see Inman News story).
Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke say that they have studied other alternatives, but that allowing the Treasury department to borrow $700 billion to buy up troubled assets in competitive auctions is the best course of action. Paulson and Bernanke spent much of last week trying to persuade lawmakers to support the plan, saying the alternative would be a deepening of the credit crisis and cutbacks in lending that would have severe repercussions (see story).
Over the weekend, lawmakers from both parties drafted legislation they said would allow the administration to move forward with its $700 billion plan, but imposed new conditions intended to improve oversight and protect taxpayers.
Backers of the resulting bill, the Emergency Economic Stabilization Act of 2008 (HR 3997), said it would protect taxpayers by giving the government a financial stake in institutions that sold assets to the government, and by placing limits on executive compensation at companies that sold more than $300 million in assets.
HR 3997 would also create an industry-funded insurance program guaranteeing troubled assets purchased by the government, a proposal put forward by House Republican Leader Rep. John Boehner of Ohio last week as an alternative to buying up distressed assets like mortgage-backed securities.
Boehner urged support of the plan hammered together over the weekend, calling it an "imperfect product" that would be "the easiest thing in the world for me to say ‘no’ to" — if he didn’t believe the nation was "on the brink of an economic disaster."
The American people are angry and scared, Boehner said, acknowledging that because every member of the House seeking reelection must pass muster with voters in November, "nobody wants to be anywhere around this bill."
Another influential Republican, Alabama Rep. Spencer Bachus, said it was impossible to know if Paulson and Bernanke’s dire warnings would come true if the bill was voted down.
Bachus said he was "not willing to put that bullet in the revolver and spin it. I’m not willing to take that gamble. I’m not willing to expose the American people to the worst-case scenario."
But in the end, only 65 Republicans voted for the bill, joining the 140 Democrats who supported the Bush administration’s modified plan. Some Republicans said House Speaker Nancy Pelosi, D-Calif., wrecked the bill’s chances with a speech shortly before the vote that blame the Bush administration’s "anything goes" economic policies for the current crisis.
President Bush made a pitch for the "rescue" bill Monday morning, saying that while it would commit up to $700 billion in taxpayer dollars to a rescue, the ultimate cost to taxpayers would be far less.
"In fact, we expect that over time, much — if not all — of the tax dollars we invest will be paid back," Bush said, citing findings by the nonpartisan Congressional Budget Office and the Office of Management and Budget.
The National Association of Realtors had supported the thinking behind the administration’s plan, issuing a statement on Sept. 22 calling such efforts "imperative to restore market liquidity." NAR said many securities are being valued at pennies on the dollar due to the very high leverage ratio and illiquidity of certain mortgage-backed securities, and that unrealistically low valuations "are paralyzing the balance sheets of financial institutions and have hindered liquidity flow."
After the vote, the Mortgage Bankers Association urged congressional and administration negotiators to "immediately regroup and find common ground upon which they can build a new agreement. Restoring liquidity to the credit markets is crucial to both stabilizing Wall Street and keeping the U.S. economy moving forward."
The credit crunch is not only preventing financial institutions from being able to access capital, but preventing large and small businesses from borrowing money they need to operate their businesses, upgrade facilities and equipment, and hire and pay workers, the group said.
Although Republicans led the charge against the bill, it also had its detractors among Democrats — 94 voted against it.
In the debate before the vote, Rep. Marcy Kaptur, D-Ohio, complained that "America needs the right deal, not a fast deal."
Sheila Jackson Lee, D-Texas, said, "The problem has been diagnosed, but America needs a second opinion."
After the vote, Rep. Lloyd Dogget, D-Texas, said that although he voted against HR 3997, he’s not opposed to "reasonable steps to intervene in the economy, providing taxpayers are protected."
Dogget joined Republicans in urging the Securities and Exchange Commission to suspend mark-to-market accounting rules on mortgage-backed securities, and for the Federal Deposit Insurance Corp. to use a "net worth" approach in evaluating banks assets, as was done during the aftermath of the Savings and Loan crisis in the 1990s.
One leader of the negotiations, House Financial Services Committee Chairman Barney Frank, D-Mass., said that the bill would have given the federal government significant power to prevent foreclosures in pools of loans it would buy under the plan.
"Please don’t throw it out because you are unhappy with some of its provisions," Frank urged before his fellow lawmakers did just that.
Frank and other supporters of the bill tried to make the Bush administration’s proposal more palatable by requiring companies that sold bad assets to the government to provide warrants giving taxpayers shared ownership in the companies and allowing them to benefit from any future growth. The bill would also require companies to give up some tax benefits and in some cases, agree to limit executive pay like "golden parachutes" for ousted executives.
Instead of giving the Treasury all the funds at once, the legislation would authorize an initial $350 billion debt issue, with $250 billion up front and an additional $100 billion if the president certified it was necessary. The final $350 billion requested by the administration would be subject to a congressional resolution of disapproval.
Although a proposal by Democrats to allow bankruptcy judges to modify troubled borrowers loan terms was withdrawn, the bill would have required Treasury to modify troubled loans where possible to help families avoid foreclosure. The bill’s language also called for expanding the eligibility for the FHA’s HOPE for Homeowners loan guarantee program.
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Editor’s note: this story has been edited to correct that Wachovia was purchased by Citigroup Inc.
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