29 September 2008

House of Representatives Rejects Massive Financial Rescue Plan

Bush administration considers next steps, acts on related measures

House Republican leader John Boehner, center, speaks to reporters after the failed House vote on the financial rescue package.

By Andrzej Zwaniecki
Staff Writer

Washington — The U.S. House of Representatives rejected the initial version of a $700 billion plan to shore up the U.S. and global financial systems, which have been jeopardized by the fallout from the U.S. mortgage crisis.

Despite the bipartisan compromise deal struck September 28 by the Bush administration and congressional leaders, on September 29 the chamber defeated the measure 205-228 as most Republicans refused to support it. The Dow Jones Industrial Average stock index fell 778 points, or close to 7 percent, on the news, the largest one-day drop in the index since 2001.

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 Senate had planned to vote on the plan October 1.

President Bush expressed disappointment over the surprising defeat of the plan, which was put together by his Treasury Department with support from the Federal Reserve, the U.S. central bank.

Treasury Secretary Henry Paulson, the plan’s main promoter, expressed a similar sentiment when he said the measure “is much too important to simply let fail.” The plan was designed to restore investors’ confidence in the financial markets and boost the credit system, which was significantly weakened by the collapse of the U.S. mortgage market.

Bush said he and his administration will be working with Congress on the next step.

“Our strategy is to continue to address this economic situation head on,” he said.

In a September 27 radio address, the president warned the rejection of the plan or a significant delay in approving it might cause the failure of the financial system. This “would mean financial hardship for many of you,” he told Americans.

Traders on the floor of the New York Stock Exchange watch a television as the vote on the rescue package is counted.

But many private economists and ordinary Americans have remained unconvinced about the necessity, effectiveness, cost or timing of the plan. All House members face re-election in November, and some were reluctant to support the unpopular plan.

OTHER ACTIONS

While the Bush administration has been meeting with congressional leaders on the bill, it also has taken action to shore up the financial markets in ways that do not require congressional approval.

It initiated a temporary guarantee program for money market funds and facilitated the sale of Wachovia Bank to Citigroup to prevent market disruptions from Wachovia’s possible collapse.

The Federal Reserve, together with central banks of several other countries, took additional steps to prevent the crisis from spreading to the international currency markets.

The rejected version of the bill calls for the government to act as the buyer of last resort for mortgage-backed and other securities held by struggling financial institutions. These securities lost much of their value as hundreds of thousands of Americans defaulted on their home loans. If the bill were to pass, it would amount to the largest government intervention in the markets since the Great Depression of the 1930s.

The drafters of the plan expected banks and other investors strengthened by government money to make new loans and keep credit lines open and the government to sell the discounted loan packages at a later time when markets stabilize.

Under pressure from House Republicans, some funds were supposed to be devoted to a government insurance program for distressed mortgage-backed securities that banks decide to keep.

During the negotiations, the three-page proposal submitted by Treasury Secretary Henry Paulson grew to more than 100 pages of legislation that included oversight provisions related to lawmakers’ many reservations about the plan, its effectiveness and its cost to the taxpayers.

In the wake of the vote, leaders of both political parties pledged to continue to work on legislation to address the financial crisis, but it is unclear precisely how Congress will proceed.