Wednesday, October 1, 2008

Senate passes $700B rescue; House votes lured


WASHINGTON - After one spectacular failure, the $700 billion financial industry bailout found a second life Wednesday, winning lopsided passage in the Senate and gaining ground in the House, where Republicans opposition softened.

Senators loaded the economic rescue bill with tax breaks and other sweeteners before passing it by a wide margin, 74-25, a month before the presidential and congressional elections.

In the House, leaders were working feverishly to convert enough opponents of the bill to push it through by Friday, just days after lawmakers there stunningly rejected an earlier version and sent markets plunging around the globe.

The measure didn't cause the same uproar in the Senate, where both parties' presidential candidates, Republican John McCain and Democrat Barack Obama, made rare appearances to cast "aye" votes, as did Obama's running mate, Sen. Joe Biden of Delaware.

In the final vote, 39 Democrats, 34 Republicans and independent Sen. Joe Lieberman of Connecticut voted "yes." Nine Democrats, 15 Republicans and independent Sen. Bernie Sanders of Vermont voted "no."

President Bush issued a statement praising the Senate's move. With the revisions, Bush said, "I believe members of both parties in the House can support this legislation. The American people expect and our economy demands that the House pass this good bill this week and send it to my desk."

The rescue package lets the government spend billions of dollars to buy bad mortgage-related securities and other devalued assets held by troubled financial institutions. If successful, advocates say, that would allow frozen credit to begin flowing again and prevent a deep recession.

Even as the Senate voted, House leaders were hunting for the 12 votes they would need to turn around Monday's 228-205 defeat. They were especially targeting the 133 Republicans who voted "no."

Their opposition appeared to be easing after the Senate added $110 billion in tax breaks for businesses and the middle class, plus a provision to raise, from $100,000 to $250,000, the cap on federal deposit insurance.

They were also cheering a decision Tuesday by the Securities and Exchange Commission to ease rules that force companies to devalue assets on their balance sheets to reflect the price they can get on the market.

There were worries, though, that the tax breaks would cause some conservative-leaning "Blue Dog" Democrats who voted for the rescue Monday to abandon it. The bill doesn't designate a way to pay for many of the tax cuts, and Blue Dogs typically oppose any measure that swells the deficit.

"I'm concerned about that," said Rep. Steny Hoyer, D-Md., the majority leader.

Raising the deposit insurance limit — along with the SEC's accounting change — helped House Republicans claim credit for some substantive changes. And with constituent feedback changing dramatically since Monday's shocking House defeat and the corresponding market plunge, lawmakers' comfort level with the package increased markedly.

Rep. John Shadegg, R-Ariz., who voted "no" on Monday, said he was leaning toward switching, and Rep. Steve LaTourette,R-Ohio, said he was "getting there." Several others were weighing a flip, said Republican officials who spoke on condition of anonymity because the lawmakers had not yet announced how they would vote.

Leaders in both parties, as well as private economic chiefs everywhere, said Congress must quickly approve some version of the bailout measure to start loans flowing and stave off a potential national economic disaster.

"This is what we need to do right now to prevent the possibility of a crisis turning into a catastrophe," Obama said on the Senate floor. In Missouri, before flying to Washington to vote, McCain said, "If we fail to act, the gears of our economy will grind to a halt."

Critics on the right and left assailed the rescue plan, which has been panned by their constituents as a giveaway for Wall Street, and has little obvious direct benefit for ordinary Americans.

Sen. Jim DeMint, R-S.C., a leading conservative, said the step was "leading us into the pit of socialism."

Sanders, a self-described socialist, said the rescue was fundamentally unfair.

"The masters of the universe, those brilliant Wall Street insiders who have made more money than the average American can even dream of, have brought our financial system to the brink of collapse," Sanders said, and are demanding that the middle class "pick up the pieces that they broke."

Still, proponents argued that the financial sector's woes were already being felt by ordinary people in the form of unaffordable credit and underperforming retirement savings and without the bailout would soon translate into even more economic pain for working Americans, including more job losses.

"There will be no balloons or bunting or parades," when the rescue becomes law, said Sen. Chris Dodd, D-Conn., the Banking Committee chairman. But lawmakers will have "the knowledge that at one of our nation's moments of maximum economic peril, we acted — not for the benefit of a particular few, but for all Americans."

Sen. Judd Gregg, R-N.H., said the intense, at times contentious, 11-day round of bipartisan talks to craft the bailout — which followed dire warnings of impending economic meltdown from Bush's economic chiefs to congressional leaders — was an "extraordinary experience."

"This is the way government's supposed to work, folks, and it did," Gregg said.

The Senate specializes in high-stakes legislating by enticement, and the long list of sweeteners it added was designed to attract votes from various constituencies.

In addition to extending several tax breaks popular with businesses, the bill would keep the alternative minimum tax from hitting 20 million middle-income Americans and provide $8 billion in tax relief for those hit by natural disasters in the Midwest, Texas and Louisiana.

Tax cuts new and old are favorites for most House Republicans. Help for rural schools was aimed mainly at lawmakers in the West, while disaster aid was a top priority for lawmakers from across the Midwest and South.

Another addition, to extend the deductibility of state and local taxes for people in states without income taxes, helps Florida and Texas, among others.

Increasing the deposit insurance cap was a bid to reassure individuals and small businesses that their money would be safe if their banks collapsed. It was particularly geared toward small banks that fear customers will pull their money and park it in larger institutions seen as less likely to fold.

The FDIC would be allowed to borrow unlimited money from the Treasury Department through the end of next year as a way to cover the increased insurance limit. If used, it would be the first time the agency has tapped Treasury for a loan since the early 1990s.

The rescue bill hitched a ride on a popular measure that gives people with mental illness better health insurance coverage. Before passing it, senators voted by an identical 74-25 margin to attach the massive bailout and the tax breaks.

(This version corrects vote breakdown of yes votes to 39 Democrats, 34 Republicans and one Independent.)

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Ron Paul: Buying bad debt is the wrong solution

(CNN) -- Two days after the House rejected the $700 billion bailout bill, the Senate is set to vote on the rescue plan for financial institutions.

Rep. Ron Paul said he believes the $700 bailout bill will not solve the financial crisis.

Rep. Ron Paul said he believes the $700 bailout bill will not solve the financial crisis.

The vote is scheduled for after sundown Wednesday.

Republican presidential nominee Sen. John McCain, Democratic nominee Sen. Barack Obama, and Obama's running mate, Sen. Joe Biden, all said they would be present for the vote.

Speaking to CNN's John Roberts on Wednesday, House Financial Services Committee member and former Republican presidential candidate Rep. Ron Paul discussed why he thinks the bailout bill is the wrong solution to the economic problem and what he would do to secure financial security.

John Roberts: Congressman, great to see you. I was browsing around on your Web site, Campaign for Liberty. And right there on the very front page, you are appealing to your supporters -- and there are tens of thousands of them -- to get in touch with key senators to tell them to vote this bill down when it comes to a vote in the Senate at sundown tonight.

Why do you want them to vote it down?

Rep. Ron Paul: I think it's a bad bill. I think it's bad for the taxpayers. I think it's doing more of the same thing. The same policy that we're following now with this bill is exactly how we got into that trouble.

And you know, I really don't have that much clout in Washington, D.C. And I recognize it. But there are a couple people outside of Washington that care about what I'm thinking and care about free market ... economics. And they will respond. And I think we did help generate a little bit of mail to the House members.

So you go where you can have the influence. And I think that people -- the grassroots -- understand this a lot better than members of Congress give them credit for.

Roberts: So, instead of the bills that are currently before the Senate, the one that may be before the House as early as Thursday, what would you do?

Paul: Well, we need to do a lot, but a lot differently. We have to recognize how we got into this problem. We have too much debt. We have too much malinvestment.

Roberts: OK, OK. So we recognize all of the things that got us here. But, right now, today, what would you do, if not this bill?

Paul: You have to liquidate those mistakes. Those mistakes were made due to monetary policy. So you have to allow the market to adjust prices downward. And that's what we're not allowing to do.

If there are too many houses and the prices are too high, the sooner we get the prices down to the market level, as soon as we quit trying to encourage more housing -- this is what we're doing. They're trying to stimulate houses and keep prices high. It's exactly opposite of what we should do.

So, we should get out of the way and not buy up bad debt. There's illiquid assets, but most of those are probably worthless. They're mostly derivatives. And we're sticking those with the taxpayer. So we have to recognize that the liquidation of debt is crucial. And if we did that, we would have tough times, there's no doubt about it, for a year. But if we keep propping a system up that's not viable, we're going to have a problem for decades, just like we did in the Depression. That's what we're on the verge of doing.

Roberts: Congressman Paul, what do you think of this idea that's being floated -- this process called mark to market, which would, they would modify the rules so that the, right now, paper that a lot of these institutions are holding, which is worth nothing, they would actually be able to assign some sort of value to it.

Some people are saying that that would just hide the problem. Other people are wondering if maybe that might create some sort of voodoo accounting that would allow widespread abuse in the system.

What do you think?

Paul: It demonstrates the problem. You know, when they prevented them from marking them down, this was an SEC [Securities and Exchange Commission] regulation. Shows how regulations backfire.

If you had a market economy and then if you had a market-adjusted FDIC, where insurance was based on the strength of the bank, this would have happened on a daily basis. But instead, we insure everybody, no matter what the bank is doing, and we do it, either we overkill -- we give you too much credit on bad investments -- and then we make changes all of a sudden, and they're drastic, to what they have done.

So, it's impossible. It's either too little or too much. And what you need is insurance of, FDIC type of insurance, has to be driven by the marketplace to measure the viability of a bank.

Roberts: So what do you think?

Paul: This adds to all the moral hazard that we have in the system.

Roberts: So what do you then think of this idea of raising the limit on [FDIC] insurance to $250,000, from its current cap of $100,000?

Paul: Well, on the short run it will calm the markets. People will feel better. I might even personally feel better for a week or two.

But I know that long term, it's the wrong thing to do. I opposed this in the early '80s when they went from 30 [thousand dollars] to 100 [thousand dollars], saying it would lead to more problems like this with malinvestment. It would cover over the mistakes. And the same thing will happen.

But if we raise it to 250 [thousand dollars], people are going to feel better, then it will keep the bubble going for a little while longer and putting more pressure on the dollar. If the dollar lasts longer, then finally the world will give up on the dollar -- and then we will have a big problem that nobody has even really begun to think about.

Roberts: A lot of people might hope that you're wrong with your projection.

Paul: I do too. I hope I'm wrong.

Roberts: You tend to be right on these things on occasion, though. Dr. Paul, it's good to talk to you. Appreciate it.

Paul: Thank you.

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How Microsoft’s Co-Founders Are Spending Their Political Bucks

By Rick Anderson

Who are Seattle's two filthy richest backing for president? With less than two months to go, Bill Gates and Paul Allen aren't clearly tipping their hands. Gates has given John McCain $2,500—but that was for the Republican's Senate campaigns back in 1998 and 2003. (Gates also gave George Bush $2,000 in 2003.) Allen gave Hillary Clinton $2,300 for her unsuccessful White House bid, but so far isn't on the federal record as backing Obama, the candidate she's since endorsed.

Each multi-billionaire gave $5,000 to Microsoft's PAC, which doles out funds to both parties. Likewise, the two have individually spread their hefty political dollars to both sides of the aisle. Gates has given Yakima Republican Rep. Cathy McMorris Rodgers $3,300 for her current re-election bid, and supports Republican Rep. Dave Reichert with $4,600 in donations. (Gates' father, Seattle attorney William H. Gates, has given Reichert opponent Darcy Burner $1,500.) Allen gave Reichert $2,300 for his re-election campaign, but, like Gates junior, has also supported Democrats, including congressmen Norm Dicks, Rick Larsen, Adam Smith, and Jay Inslee.

Gates, who has leaned to the right in the past, is listing a bit left this time. He has doled out money to five GOP political action committees and five Dem PACs this election cycle. And while he gave $8,000 to Republicans, he donated $16,000 to Democrats, including $10,000 to the Democratic Congressional Campaign Committee.

The elder Gates, however, is on the record as a solid Dem backer, and has given $2,300 to both Clinton and Obama.

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George Soros hates Paulson's bailout

George Soros use this small.jpg

George Soros (AP Photo/Manish Swarup)

by Frank James

George Soros, billionaire financial speculator, philanthropist and liberal boogeyman to many conservatives, doesn't like Treasury Secretary Henry Paulson Jr. $700 billion bailout plan.

Indeed, from his Financial Times opinion piece, it doesn't sound like he'd allow Paulson to manage any of his billions of dollars.

Here's an excerpt. Pay close attention to what he says about "asymmetric information," one of his favorite subjects. it's the idea that not all parties in financial transactions have equal access to best-informed party usually has the upper hand:

Mr Paulson's record does not inspire the confidence necessary to give him discretion over $700bn. His actions last week brought on the crisis that makes rescue necessary. On Monday he allowed Lehman Brothers to fail and refused to make government funds available to save AIG. By Tuesday he had to reverse himself and provide an $85bn loan to AIG on punitive terms. The demise of Lehman disrupted the commercial paper market. A large money market fund "broke the buck" and investment banks that relied on the commercial paper market had difficulty financing their operations. By Thursday a run on money market funds was in full swing and we came as close to a meltdown as at any time since the 1930s. Mr Paulson reversed again and proposed a systemic rescue.

Mr Paulson had got a blank cheque from Congress once before. That was to deal with Fannie Mae and Freddie Mac. His solution landed the housing market in the worst of all worlds: their managements knew that if the blank cheques were filled out they would lose their jobs, so they retrenched and made mortgages more expensive and less available. Within a few weeks the market forced Mr Paulson's hand and he had to take them over.

Mr Paulson's proposal to purchase distressed mortgage-related securities poses a classic problem of asymmetric information. The securities are hard to value but the sellers know more about them than the buyer: in any auction process the Treasury would end up with the dregs. The proposal is also rife with latent conflict of interest issues. Unless the Treasury overpays for the securities, the scheme would not bring relief. But if the scheme is used to bail out insolvent banks, what will the taxpayers get in return?

Soros then gives a big shout out to Sen. Barack Obama.

Barack Obama has outlined four conditions that ought to be imposed: an upside for the taxpayers as well as a downside; a bipartisan board to oversee the process; help for the homeowners as well as the holders of the mortgages; and some limits on the compensation of those who benefit from taxpayers' money. These are the right principles. They could be applied more effectively by capitalising the institutions that are burdened by distressed securities directly rather than by relieving them of the distressed securities.

The injection of government funds would be much less problematic if it were applied to the equity rather than the balance sheet. $700bn in preferred stock with warrants may be sufficient to make up the hole created by the bursting of the housing bubble. By contrast, the addition of $700bn on the demand side of an $11,000bn market may not be sufficient to arrest the decline of housing prices.

Something also needs to be done on the supply side. To prevent housing prices from overshooting on the downside, the number of foreclosures has to be kept to a minimum. The terms of mortgages need to be adjusted to the homeowners' ability to pay.

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Bailout: Senate to vote Wednesday

By staff

NEW YORK ( -- The Senate plans to vote on the $700 billion bank rescue plan Wednesday evening - two days after the House failed to pass it.

The bill adds new provisions - including raising the FDIC insurance cap to $250,000 from $100,000 - and will be attached to an existing tax bill that the House also rejected Monday, according to several Democratic leadership aides.

The vote is scheduled for after sundown, in observance of Rosh Hashanah. Republican presidential nominee John McCain, R-Ariz., and Democratic nominee Barack Obama, D-Ill., and his running mate Joe Biden, D-Del., confirmed that they would be present for the vote.

Senate Majority Leader Harry Reid, D-Nev., and Minority Leader Mitch McConnell, R-Ky., announced the plan Tuesday night.

"Senate Democrats and Republicans believe it is essential that we work quickly on this important legislation to restore confidence to our financial system and strengthen the economy," Reid said in a statement.

White House spokesman Tony Fratto said the administration welcomes the "modified bill" and the scheduled vote.

Democratic sources told CNN that they expect bipartisan support in the Senate.

Tuesday afternoon, Federal Deposit Insurance Corp. Chairman Sheila Bair asked Congress to allow her agency to increase the $100,000 limit per account that has been in place since 1980. To do so would help restore confidence in the markets, she said. Bair did not say what she thinks the new limit should be.

The revised bill contains provisions that the Senate hopes will appeal to House Republicans, who voted two-to-one against the original legislation. The sweeteners include renewable energy tax incentives - for individuals and businesses alike - that have been on the table for several months and had a chance of passing at some point anyway.

The bill also includes relief from the Alternative Minimum Tax, without which millions of Americans would have to pay the so-called "wealth tax."

The debate over extending AMT relief is an annual political ritual. It enjoys bipartisan support but deficit hawks on both sides of the aisle contend the cost of providing that relief should be paid for. Others argue it shouldn't be paid for because the AMT was never intended to hit the people the relief provisions would protect. Nevertheless, lawmakers pass the measure every year or two.

The revised bailout bill also includes a "Mental Health Parity" provision, which would require health insurance companies to cover mental illness at parity with physical illness.

House Speaker Nancy Pelosi, D-Calif., said that House leaders are discussing ideas offered by other lawmakers about how to modify the bill defeated on Monday. "House Democrats remain strongly committed to a comprehensive bill that stabilizes the financial markets, restores confidence, and protects taxpayers," she said.

House Minority Leader John Boehner, R-Ohio, was consulted on the Senate's plans and gave his "green light," Boehner spokesman Kevin Smith said.

"We believe we'll have a better chance to pass this bill than the one that failed [Monday]," Smith added.

However, one aide in the GOP Senate leadership said swaying House Democrats to get on board with the sweetened bill will be "a fairly substantial problem."

The plan could attract Republicans in the House while simultaneously alienating bailout supporters among the Democrats because the tax cuts in the revenue bill aren't offset by spending cuts or increased revenues.

"I am talking with my House colleagues about the Senate action and how to best proceed taking that into consideration in determining what action in the House will be most successful," said House Majority Leader Steny Hoyer, D-Maryland.

Round 1 failed

The bailout package, a collaboration of Treasury Secretary Henry Paulson and leaders from both parties, was rejected by the House in a 228-205 vote Monday. Two-thirds of Republicans and about one-third of Democrats voted against the bill.

Following the defeat, the Dow Jones industrial average dropped 777 points, its biggest one-day point decline ever. The decline of nearly 7% was the largest one-day percentage decline since Sept. 17, 2001, the first day the markets reopened after the Sept. 11 attacks. (See correction.)

But stocks rallied Tuesday, with the Dow jumping 485 points on bets that Congress will pass a version of the government's $700 billion package.

The bill, if approved, would allow the federal government to buy troubled mortgage-related investments from financial institutions, freeing them up for lending in a bid to pull the economy out of its credit freeze.

Proponents of the bill believe it would prevent the United States from sliding into a serious financial crisis, but opponents saw it as an unbearable burden to taxpayers and a rescue for Wall Street.

The Bush administration and key lawmakers had regrouped on Tuesday and vowed to push ahead. "Unfortunately, the measure was defeated by a narrow margin," President Bush said in a brief televised address at the White House. "I'm disappointed by the outcome, but I assure our citizens, and citizens around the world, that this is not the end of the legislative process."

The House is adjourned and not scheduled to return to session until Thursday at noon.

Bush pushed hard for lawmakers to act. "Our economy is depending on decisive action from the government," he said. "The sooner we address the problem, the sooner we can get back on the path of growth and job creation. This is what elected leaders owe the American people, and I am confident that we'll deliver."

On Tuesday, Bush also spoke to Obama and McCain about the financial crisis, according to Fratto. The presidential candidates "offered ideas and reaffirmed what they have said publicly - that this is a critical issue that needs to be addressed," Fratto said.

CNN's Jessica Yellin, Deirdre Walsh and Ted Barrett contributed to this story.

Correction: An earlier version of this story incorrectly stated the 7% drop in the Dow on Monday was the second biggest one-day decline since Black Monday in 1987, when the Dow dropped 22%.

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