The Bailout: Senate Is Next


A vote is scheduled for Wednesday night on a modified Paulson plan, with tax breaks and more FDIC protection for depositors

After a seemingly quiet day in Washington—at least by the standards of recent weeks—the saga of the Treasury's stalled $700 billion rescue package for the financial sector took another surprising turn early on Tuesday evening. Senate leaders announced that rather than wait for another round of wrangling over the controversial plan in the House, they would hold a vote Wednesday night, Oct. 1, at 7:30 in hopes of bringing the bailout back to life.

To sweeten the package enough to win over the Republican votes needed for passage, the bill will also include a new proposal to increase Federal Deposit Insurance Corp. (FDIC) insurance for individual bank accounts from $100,000 to $250,000, along with some unrelated tax breaks for business and alternative energy that had been stalled, plus changes to the alternative minimum tax. Legislators and regulators hope that bolstering insurance for bank deposits will help calm the popular backlash against the bill, by giving something to average Americans increasingly anxious about the safety of the funds they have stashed in banks. The increased insurance is also something many small businesses and banks have long clamored for.

Senate leaders appear confident that by increasing FDIC insurance, they will ensure enough support for the bill to pass the Senate, after which it will move to the House. And after Monday's debacle, it is also likely that House leaders have tallied up the votes and are comfortable predicting that the additional FDIC insurance would be enough to bring a victory in the House as well. "They must know that adding in the FDIC coverage can get the bill past the House, too," predicted Scott Talbott, a senior vice-president for the Financial Services Roundtable, a group of the industry's largest players. "Otherwise, they wouldn't bring the bill up again yet."

Candidates Coming Back

Democratic Presidential contender Barack Obama announced plans to come back for the vote. CNN reported that the Republican nominee, Senator John McCain, and Senator Joseph Biden (D-Del.), Obama's running mate, would also be in town for the vote.

Still, the vote isn't 100% certain to take place. Final language for the bailout package was still being drafted Tuesday night, even after Senate Minority Leader Mitch McConnell (R-Ky.) and Majority Leader Harry Reid (D-Nev.) announced the deal on the Senate floor. Both have to sign off on the final language before a vote can be held. The shift came after a day of maneuvering in Washington, in which all sides attempted to figure out what additions would be needed to gain more Republican support for the rescue package. Many members of Congress and their staffers were out of the capital on Tuesday and Wednesday due to the Jewish holiday of Rosh Hashanah. So much of the activity took place in series of informal meetings as the various factions of Republicans and Democrats took stock of Monday's failed vote and the resulting stock market rout (BusinessWeek.com, 9/29/08), which erased $1.2 trillion of value as the Dow tumbled 778 points. Stocks rebounded Tuesday (BusinessWeek.com, 9/30/08), with the Dow rising 485 points on hopes for an eventual passage of the bill. Legislative leaders studied the voting pattern closely and spent the day assessing what changes would be needed to garner the roughly dozen votes needed to cross the finish line.

The day began with an early-morning television address by President George W. Bush, who tried to dial back the populist backlash (BusinessWeek, 9/24/08) against what many perceive as a bailout for Wall Street. He warned the nation that "the consequences will grow worse each day if we do not act."

Taming Rebellious Republicans

White House Chief of Staff Josh Bolten also headed to Capitol Hill to try to win over some of the rebellious House Republicans who helped defeat the bill. Senate Majority Leader Reid sat down with Senate Banking Chairman Christopher Dodd (D-Conn.) and other Democrats to consider their options, while Senate Minority Leader McConnell hit the Senate floor to pledge that Republicans would continue to work toward progress. "I too want to reassure the American people that we intend to pass this legislation this week. We will pass it on a broad bipartisan basis, both sides cooperating to prevent this financial crisis from persisting," McConnell said. "I think the message from the markets yesterday was clear."

Moreover, in the wake of Monday's huge stock market losses—and a more concerted effort by the bill's backers to persuade voters that passage will help keep mortgages, student loans, and other credit flowing to average Americans, rather than just bail out Wall Street—some of the vehement early opposition to the bill appears to be receding. Congressional staffers now say they have begun to receive calls urging support for the plan, a sharp contrast from the weekend, when calls ran overwhelmingly against it. And in a new survey by pollster Scott Rasmussen, some 33% of likely voters now support it, vs. 24% last Friday.

The shift increased the pressure to come up with a workable new solution, fast. And throughout the day there was growing talk that increasing FDIC insurance on individual bank accounts from the current level of $100,000 to $250,000—at least for one year—might go a long way toward roping in Republican votes. House Republicans had proposed a bump-up in FDIC insurance early in last week's negotiations, but the idea had gained little traction.

Candidates Like Higher Cap

On Tuesday morning, however, Obama endorsed the idea, and his Republican rival did so hours later on CNN. And though House Republicans displayed little sign of narrowing their deep divisions over what to do next, Minority Leader John Boehner (R-Ohio) released a statement saying "the Presidential candidates' support for increasing the FDIC cap is welcome news."

Such a change (BusinessWeek.com, 9/30/09) will help win over moderate Republicans, argues Daniel Clifton, the head of the Washington office of Strategas Research Partners, an investment advisory firm. The thought was seconded by one high-ranking Democratic aide. Republicans needed "to figure out something that appeals to the populists" complaining about the package, he says. That wouldn't have been likely to happen by adding a reduction in capital-gains taxes, as some Republicans have called for.

"I don't know if increasing FDIC insurance would be enough, but it's something that small banks have always wanted," the Democratic aide adds. Small businesses might be happy to see such a move as well, as would many individuals now worried about how safe their money is. That could help calm fears that more bank runs are ahead if more institutions fail.

FDIC in Favor

By Tuesday afternoon, the idea seemed to be gaining more traction, as Sheila Bair, the head of the FDIC, came out in support. "To address this crisis of confidence, I do believe that it would be helpful for the FDIC to have the temporary ability to raise deposit insurance limits," Bair said in an e-mail to the trade publication American Banker. "This would provide the dual benefits of providing additional liquidity to banks for lending as well as provide some additional reassurance to depositors above the current limits."

Prospects for the bill's passage with only the addition of the FDIC insurance and the tax breaks were also helped by a move earlier in the day by the SEC to clarify the rules on an accounting rule known as "mark-to-market." Some Republicans, and a few Democrats, have called for the legislative package to include a suspension of "mark-to-market" accounting for troubled financial companies. As prices for mortgage-related assets have tumbled—and prices are hard to come by at all for some securities—companies face having to lower the assets' values on their balance sheets. That can mean potentially painful consequences, as they are forced to raise more capital in a market in which few investors are willing to step up.

Financial-services firms have lobbied heavily for such a change to be included in the bill, arguing that market values in such circumstances don't reflect the assets' "true" values, and that companies should be allowed to use other figures instead. Opponents argue the move would only mislead investors, further undermining trust in the underlying health of financial companies.

SEC Issues Guidance

On Tuesday afternoon, the Securities & Exchange Commission and accounting rule makers issued guidance emphasizing the role of judgment in valuing these assets when market prices aren't readily available. Although the guidance didn't break new ground, accounting experts say it could be interpreted as giving companies more flexibility, reassuring them that they can be more lenient in marking down troubled assets—using discounted cash flows to estimate a current value, for example, on the belief that they are fundamentally sound and that pricing is likely to recover. Financial-services lobbyists were clearly happy with the shift.

"That's exactly what we have been arguing for," says Talbott. "If no one wants to buy an asset, there's no market for it. But if people are still paying off their mortgages, they have real economic value" that is not reflected by current mark-to-market values.

The SEC's move gave the recalcitrant Republicans one more item that they had fought to get included in the bill, helping clear the way for the more limited changes that the Senate will vote on Wednesday night. Will it be enough? Congressional leaders appeared confident it will be, but we've all been here before.


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