Defying President Bush, their own caucus leaders and both presidential candidates, members of the House of Representatives on Monday voted down the $700 billion bipartisan plan to rescue a U.S. financial system laced with bad mortgage debt. The tally was 228-205, with Republicans heavily opposing the measure.
The extraordinary vote threw Congress and the stock market into turmoil. House leaders scrambled to resurrect a more palatable bill as stocks plunged. By day’s end, the Dow Jones Industrial Average had lost 777.68 points or 6.98 percent; it was the Dow’s biggest one-day point loss ever. The NASDAQ composite index had lost 199.61 points, or 9.14 percent.
The market also reacted to news that another major U.S. commercial bank had crumbled and that three European banks had failed, sending international markets into a dive. The banking business of Charlotte-based Wachovia, the nation’s fourth largest bank, will be absorbed into Citigroup for a reported price of $2.16 billion, a move that will consolidate a third of U.S. deposits in only three mega-banks.
Pelosi vows to craft new bill
On Capital Hill, meanwhile, House Speaker Nancy Pelosi vowed to try again soon to craft a bill acceptable to both parties. She noted that while Democrats voted overwhelmingly for passage, the bill failed 2-1 on the Republican side. Minority Leader John Boehner blamed a dozen surprise defections and criticized Pelosi for a floor speech that blamed conservatives for the crisis. “She poisoned our caucus with a partisan speech,” he said. “We need to calm down and relax and get back to work.”
Democrats said that Republican failure reflects poorly on GOP leaders, including nominee John McCain, who urged support for the bill. President Bush pleaded with Congress to bass the billl; he spoke to the nation before the markets opened this morning.
Pelosi said that after the vote she told Treasury Secretary Henry Paulson, “We delivered on our side.” She said it’s critical that Congress act quickly to insulate middle-class jobs, retirements and businesses from further financial damage caused by reckless Wall Street dealmakers and a lax regulatory climate.
Wall Street a shell of what it was
Indeed, it seems a quaint memory that Merrill Lynch was once bullish on America and that Bear Stearns was among the world’s “most admired” companies. Wall Street is a shell of what it was, both in terms of financial stability and public trust. Trying to restore a semblance of each, trying to inject a whisper of confidence back into the financial system so that credit can once again flow, that’s what congressional leaders spent a nearly sleepless weekend trying to do.
After today’s failure, it wasn’t certain when the House or Senate would try again. Supporters vowed to try to bring the rescue package up for consideration again as soon as possible, perhaps late Wednesday or Thursday, but there were no definite plans to do so. Despite outrage from voters, deep anger over the greed, betrayal and naiveté that led to the worst financial crisis since the 1930s, there seems little choice but to apply taxpayers’ money to try to clean up the mess. Unless the tide of toxic housing loans are sucked out of the system, credit will be hard to come by and without credit, jobs will be shed by the millions and the economy will head faster into the tank.
That was the essence of President Bush’s sober remarks this morning. “A vote for this bill is a vote to prevent economic damage to you and your community,” he said in urging members of both parties to rally around the plan. The rescue, the largest in U.S. history, was put forward by Bush’s Treasury secretary, Henry Paulson, then substantially amended by Democrats, who insisted that government oversight of the financial markets be restored, that firms getting government be prevented from lavishly compensating their executives, and that taxpayers be protected if the plan falters.
Extremely difficult vote
Still, with an election fast approaching, the bailout was an extremely difficult vote for members of Congress, especially for conservative Republicans whose ideology resists government interference in economic matters. Rep. Connie Mack, R-Fla., spoke for many in criticizing a “huge bailout of the financial sector that will snuff out the free-market system.”
Democrats complained, too, about helping an administration that had done nothing to rein in irresponsible executives on Wall Street. Rep. Marcy Kaptur, D-Ohio, said, “Financial crimes have been committed. Now Congress is being asked to bail out the culprits.”
Indeed, the political/economic overtones have been palpable. It’s not too strong to suggest that having to nationalize this sea of bad debt brings into serious question the whole legitimacy of unfettered markets.
As the New York Times editorialized on Sunday: “It was in the Bush years that anti-regulation and deregulation found full expression, fueled by an ideology that markets know best, government hampers markets, and problems will magically fix themselves. This nation is now painfully relearning that the opposite is true.”
Said Rep. Rahm Emanuel, D-Ill.: “We’re paying a big price for ideology run amok; that’s what’s happening here.”
A culture of corruption, hubris, sharp dealing
Loosed by a wave of deregulation, the financial-services industry has fallen into a culture of corruption, hubris and sharp dealing. The once-stellar lineup of Wall Street giants has few survivors. The afore-mentioned Merrill Lynch, for example, has been folded into the Bank of America, and Bear Stearns, after collapsing, was absorbed by JP Morgan Chase at an enormous discount. Lehman Brothers has vanished. The last two big investment banks, Goldman Sachs and Morgan Stanley, have remade themselves as bank holding companies as a way to survive. In a business page summary, the New York Times declared in a Sunday headline: “Wall Street, R.I.P.”
But looking back it seems inevitable that something like this would happen. Take these three ingredients: an economy in which incomes for three-fifths of Americans have been essentially flat for 30 years; a belief that, despite stagnant incomes and mushrooming consumer debt, home ownership for nearly everyone was a wise thing to pursue, and a deregulated financial industry looking to make a fast buck. Those three ingredients look like a recipe for destruction.
The package unveiled on Sunday represented a significant compromise among the negotiators. Democrats did not get the bankruptcy and affordable-housing provisions many had hoped for, and Republicans had to swallow oversight and executive pay limits. Their efforts to have the government merely insure rather than purchase the debt also failed to be included. Regulation of “innovations” like the credit-default swaps that prompted a separate bailout of AIG, the giant insurer, is not addressed in the legislation.
Core of the plan: Treasury would buy impaired assets
The core of the plan was that the U.S. Treasury would buy impaired mortgage-related assets from financial firms, giving them cash to replace bad debts that have dissuaded them from lending. The aim was to help firms restore their capital bases so that borrowing and lending at reasonable terms could again proceed. Not only banks could have lined up for welfare checks, but other financial entities — pension funds and credit unions, for example — would have been eligible.
Money would have been available in three stages: $250 billion immediately; an additional $100 billion if the President certifies its need, and a last $350 billion if again certified by the President and passed by Congress.
A detailed description of the bill was offered by Forbes. The Wall Street Journal published a substantial tick-tock of the weekend’s negotiations.
Both presidential candidates supported the bailout. Republican John McCain said he would “swallow hard and go forward.” He told ABC, “Let’s get this deal done, signed by the president, and get moving because the real effort of this is going to restore some confidence.”
‘Not a cause for celebration’
Barack Obama called the bailout “an outrage,” but necessary. “When taxpayers are asked to take such an extraordinary step because of the irresponsibility of a relative few, it is not a cause for celebration,” he said, criticizing both Wall Street and Washington’s lax regulation.
After the failed House vote, McCain declined comment. Obama, speaking in suburban Denver, compared the day’s events to flying over the Colorado mountains. “It’s going to be a little rocky,” he said, but predicted: “It will get done; it is required to stabilize the markets.”
What’s still missing in all of this are, of course, the votes for passage and an apology from the perpetrators. Expect more votes to come before the apology.
Steve Berg reports on a variety of topics for MinnPost, including urban design, transportation, national politics and world affairs. He can be reached at sberg [at] minnpost [dot] com.