The Emergency Economic Stabilization Act of 2008, often called the "bank bailout of 2008", was proposed by
Treasury Secretary Henry Paulson, passed by the
110th United States Congress
The 110th United States Congress was a meeting of the legislative branch of the United States federal government, between January 3, 2007, and January 3, 2009, during the last two years of the Presidency of George W. Bush. It was composed of ...
, and signed into law by President
George W. Bush
George Walker Bush (born July 6, 1946) is an American politician who served as the 43rd president of the United States from 2001 to 2009. A member of the Republican Party, Bush family, and son of the 41st president George H. W. Bush, he ...
. It became law as part of
Public Law 110-343
Public Law 110-343 () is a US Act of Congress signed into law by U.S. President George W. Bush, which was designed to mitigate the growing financial crisis of the late-2000s by giving relief to so-called "Troubled Assets."
Three divisions
...
on October 3, 2008, in the midst of the
financial crisis of 2007–2008
Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fi ...
. It created the $700 billion
Troubled Asset Relief Program (TARP) to purchase
toxic asset A toxic asset is a financial asset that has fallen in value significantly and for which there is no longer a functioning market. Such assets cannot be sold at a price satisfactory to the holder. Because assets are offset against liabilities and freq ...
s from banks. The funds were mostly redirected to inject capital into banks and other financial institutions while the
Treasury
A treasury is either
*A government department related to finance and taxation, a finance ministry.
*A place or location where treasure, such as currency or precious items are kept. These can be state or royal property, church treasure or ...
continued to examine the usefulness of targeted asset purchases.
A financial crisis had developed throughout 2007 and 2008 partly due to a
subprime mortgage crisis, causing the failure or near-failure of major financial institutions like
Lehman Brothers and
American International Group
American International Group, Inc. (AIG) is an American multinational finance and insurance corporation with operations in more than 80 countries and jurisdictions. , AIG companies employed 49,600 people.https://www.aig.com/content/dam/aig/amer ...
. Seeking to prevent the collapse of the
financial system
A financial system is a system that allows the exchange of funds between financial market participants such as lenders, investors, and borrowers. Financial systems operate at national and global levels. Financial institutions consist of complex, c ...
, Secretary of the Treasury Paulson called for the U.S. government to purchase several hundred billion dollars in
distressed assets Distressed securities are securities over companies or government entities that are experiencing financial or operational distress, default, or are under bankruptcy. As far as debt securities, this is called distressed debt. Purchasing or holding s ...
from financial institutions. His proposal was initially rejected by Congress, but the ongoing financial crisis and lobbying by President Bush ultimately convinced Congress to enact the proposal as part of Public Law 110-343.
Early estimates for the bailout's risk cost were as much as $700 billion; however, TARP recovered $441.7 billion from $426.4 billion invested, earning a $15.3 billion profit or an annualized rate of return of 0.6%, and perhaps a loss when adjusted for inflation.
History
After the freeing up of world capital markets in the 1970s and the repeal of the
Glass–Steagall Act in 1999, the banking practices (mostly Greenspan inspired "self-regulation") along with
monetized subprime mortgages sold as low risk investments, reached a critical stage during September 2008, characterized by severely contracted
liquidity in the global credit markets and insolvency threats to investment banks and other institutions. In response, the U.S. government announced a series of comprehensive steps to address the problems, following a series of "one-off" or "case-by-case" decisions to intervene or not, such as the $85 billion liquidity facility for
American International Group
American International Group, Inc. (AIG) is an American multinational finance and insurance corporation with operations in more than 80 countries and jurisdictions. , AIG companies employed 49,600 people.https://www.aig.com/content/dam/aig/amer ...
on September 16, the
federal takeover of Fannie Mae and Freddie Mac, and the bankruptcy of
Lehman Brothers.
The legislation had its origin in early 2008 when
Secretary of the Treasury
The United States secretary of the treasury is the head of the United States Department of the Treasury, and is the chief financial officer of the federal government of the United States. The secretary of the treasury serves as the principal a ...
Henry Paulson directed two of his aides,
Neel Kashkari and
Phillip Swagel, to write a plan to recapitalize the U.S. financial system in case of total collapse. The plan, which was also presented to
Federal Reserve Chairman Ben Bernanke
Ben Shalom Bernanke ( ; born December 13, 1953) is an American economist who served as the 14th chairman of the Federal Reserve from 2006 to 2014. After leaving the Fed, he was appointed a distinguished fellow at the Brookings Institution. Duri ...
, called for the U.S. government to purchase about $500 billion in distressed assets from financial institutions.
The original proposal was submitted to the
United States House of Representatives, with the purpose of purchasing bad assets, reducing uncertainty regarding the worth of the remaining assets, and restoring confidence in the
credit market
The bond market (also debt market or credit market) is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the secondary market. This is usually in the form of bonds, bu ...
s. The bill was then expanded and put forth as an amendment to .
The amendment was rejected via a vote of the House of Representatives on September 29, 2008, voting 205–228.
Supporters of the plan argued that the
market intervention
Market interventions are measures that modify or interfere with the market, usually done by governments but also by philanthropic and political-action groups.
Examples of market interventions
Market interventions include:
*Bailouts pay (usually ...
called for by the plan was vital to prevent further erosion of confidence in the U.S.
credit market
The bond market (also debt market or credit market) is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the secondary market. This is usually in the form of bonds, bu ...
s and that failure to act could lead to an
economic depression
An economic depression is a period of carried long-term economical downturn that is result of lowered economic activity in one major or more national economies. Economic depression maybe related to one specific country were there is some economic ...
. Opponents objected to the plan's cost and rapidity, pointing to polls that showed little support among the public for "bailing out" Wall Street investment banks,
claimed that better alternatives were not considered, and that the Senate forced passage of the unpopular version through the opposing house by "
sweetening" the bailout package.
On October 1, 2008, the
Senate debated and voted on an amendment to
H.R. 1424, which substituted a newly revised version of the Emergency Economic Stabilization Act of 2008 for the language of H.R. 1424.
[Amendment to HR 1424]
(the amendment being the text of the Emergency Economic Stabilization Act of 2008 along with the Energy Improvement and Extension Act of 2008, and Tax Extenders and Alternative Minimum Tax Relief Act of 2008.) Senate Committee on Banking, Housing and Urban Affairs (October 1, 2008) ( Retrieved October 1, 2008) See also the Senate Committee on Banking page
Emergency Economic Stabilization Act of 2008
/ref> The Senate accepted the amendment and passed the entire amended bill, voting 74–25. Additional unrelated provisions added an estimated $150 billion to the cost of the package and increased the length of the bill to 451 pages. (''See'' Public Law 110-343
Public Law 110-343 () is a US Act of Congress signed into law by U.S. President George W. Bush, which was designed to mitigate the growing financial crisis of the late-2000s by giving relief to so-called "Troubled Assets."
Three divisions
...
for details on the added provisions.) The amended version of H.R. 1424 was sent to the House for consideration, and on October 3, the House voted 263–171 to enact the bill into law. President George W. Bush
George Walker Bush (born July 6, 1946) is an American politician who served as the 43rd president of the United States from 2001 to 2009. A member of the Republican Party, Bush family, and son of the 41st president George H. W. Bush, he ...
signed the bill into law within hours of its congressional enactment, creating the $700 billion Troubled Asset Relief Program (TARP) to purchase failing bank assets.[Temple-Raston, Dina (October 3, 2008)]
"Bush signs $700 billion bailout bill"
. NPR.
On Monday, October 6, the Dow Jones Industrial Average
The Dow Jones Industrial Average (DJIA), Dow Jones, or simply the Dow (), is a stock market index of 30 prominent companies listed on stock exchanges in the United States.
The DJIA is one of the oldest and most commonly followed equity indexe ...
dropped more than 700 points and fell below 10,000 for the first time in four years. The same day, CNN reported these worldwide stock market events: Britain's FTSE 100 Index was down 7.9%; Germany's DAX down 7.1%; France's CAC 40
The CAC 40 (french: CAC quarante ) (''Cotation Assistée en Continu'') is a benchmark French stock market index. The index represents a capitalization-weighted measure of the 40 most significant stocks among the 100 largest market caps on the ...
dropping 9%; In Russia, trading in shares was suspended after the RTS
RTS may refer to:
Medicine
* Rape trauma syndrome, the psychological trauma experienced by a rape victim
* Revised Trauma Score, a system to evaluate injuries secondary to violent trauma
* Rubinstein–Taybi syndrome, a condition characterized by ...
stock index fell more than 20%; Iceland halted trading in six bank stocks while the government drafted a crisis plan
A crisis plan is the physical manifestation of crisis management with respect to the creation of a real document – digital or otherwise – outlining a personal or organizational reaction to crisis.
Examples of a crisis plan could include a map ...
.
On October 8, the British announced their bank rescue package consisting of funding, debt guarantees and infusing capital into banks via preferred stock. This model was closely followed by the rest of Europe, as well as the U.S Government, who on the October 14 announced a $250bn (£143bn) Capital Purchase Program The Capital Purchase Program or CPP is a preferred stock and equity warrant purchase program conducted by the US Treasury Office of Financial Stability as part of Troubled Asset Relief Program (aka, TARP). According to the first congressionally ma ...
to buy stakes in a wide variety of banks in an effort to restore confidence in the sector. The money came from the $700bn Troubled Asset Relief Program.
Over the next six months, TARP was dwarfed by other guarantees and lending limits; analysis by Bloomberg found the Federal Reserve
The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after ...
had, by March 2009, committed $7.77 trillion to rescuing the financial system, more than half the value of everything produced in the U.S. that year.
Paulson proposal
U.S. Treasury Secretary
The United States secretary of the treasury is the head of the United States Department of the Treasury, and is the chief financial officer of the federal government of the United States. The secretary of the treasury serves as the principal a ...
Henry Paulson proposed a plan under which the U.S. Treasury would acquire up to $700 billion worth of mortgage-backed securities.[
] The plan was immediately backed by President George W. Bush
George Walker Bush (born July 6, 1946) is an American politician who served as the 43rd president of the United States from 2001 to 2009. A member of the Republican Party, Bush family, and son of the 41st president George H. W. Bush, he ...
and negotiations began with leaders in the U.S. Congress to draft appropriate legislation.
Consultations among Treasury Secretary Henry Paulson, Chairman of the Federal Reserve
The chair of the Board of Governors of the Federal Reserve System is the head of the Federal Reserve, and is the active executive officer of the Board of Governors of the Federal Reserve System. The chair shall preside at the meetings of the Boa ...
Ben Bernanke
Ben Shalom Bernanke ( ; born December 13, 1953) is an American economist who served as the 14th chairman of the Federal Reserve from 2006 to 2014. After leaving the Fed, he was appointed a distinguished fellow at the Brookings Institution. Duri ...
, U.S. Securities and Exchange Commission chairman Christopher Cox
Charles Christopher Cox (born October 16, 1952) is an American attorney and politician who served as chair of the U.S. Securities and Exchange Commission, a 17-year Republican member of the United States House of Representatives, and member of ...
, congressional leaders, and President Bush, moved forward efforts to draft a proposal for a comprehensive solution to the problems created by illiquid assets. News of the coming plan resulted in some stock, bond, and currency markets stability on September 19, 2008.
The proposal called for the federal government to buy up to US$700 billion of illiquid mortgage-backed securities with the intent to increase the liquidity of the secondary mortgage markets and reduce potential losses encountered by financial institutions owning the securities. The draft proposal was received favorably by investors in the stock market, but caused the U.S. dollar to fall against gold, the Euro, and petroleum. The plan was not immediately approved by Congress; debate and amendments were seen as likely before the plan was to receive legislative enactment.[Andrews, Edmund L. (September 19, 2008)]
"Bush Officials Urge Swift Action on Rescue Powers"
''The New York Times''.
''The New York Times'', Associated Press, September 20, 2008.
Throughout the week of September 20, 2008, there was contentious wrangling among members of Congress over the terms and scope of the bailout,[Prins, Nomi (September 24, 2008)]
"Bailout plan not embraced"
The Real News amplified by continued failures of institutions like Washington Mutual
Washington Mutual (often abbreviated to WaMu) was the United States' largest savings and loan association until its collapse in 2008.
A savings bank holding company is defined in United States Code: Title 12: Banks and Banking; Section 1842: Def ...
, and the upcoming November 4 national election.
*On September 21, Paulson announced that the original proposal, which would have excluded foreign banks, had been revised to include foreign financial institutions with a presence in the United States. The U.S. administration pressured other countries to set up similar bailout plans.
* On September 23, the plan was presented by Paulson and Bernanke to the Senate Banking Committee, who rejected it as unacceptable.
*On September 24, President Bush addressed the nation on prime time television, describing how serious the financial crisis could become if action was not taken promptly by Congress.
*Also on September 24, 2008, Republican Party
Republican Party is a name used by many political parties around the world, though the term most commonly refers to the United States' Republican Party.
Republican Party may also refer to:
Africa
* Republican Party (Liberia)
*Republican Party ...
nominee for President, John McCain, and Democratic Party Democratic Party most often refers to:
*Democratic Party (United States)
Democratic Party and similar terms may also refer to:
Active parties Africa
* Botswana Democratic Party
* Democratic Party of Equatorial Guinea
*Gabonese Democratic Party
*De ...
nominee for President, Barack Obama
Barack Hussein Obama II ( ; born August 4, 1961) is an American politician who served as the 44th president of the United States from 2009 to 2017. A member of the Democratic Party, Obama was the first African-American president of the U ...
, issued a joint statement describing their shared view that "The effort to protect the American economy must not fail."
The plan was introduced on September 20, by Paulson. Named the Troubled Asset Relief Program, but also known as the Paulson Proposal or Paulson Plan, it should not be confused with Paulson's earlier 212-page plan, the ''Blueprint for a Modernized Financial Regulatory Reform'', that was released on March 31, 2008.
The proposal was only three pages long, intentionally short on details to facilitate quick passage by Congress.
Mortgage asset purchases
A key part of the proposal is the federal government's plan to buy up to $700 billion of illiquid mortgage-backed securities (MBS) with the intent to increase the liquidity of the secondary mortgage markets and reduce potential losses encountered by financial institutions owning the securities. The draft proposal of the plan was received favorably by investors in the stock market.
This plan can be described as a risky investment, as opposed to an expense. The MBS within the scope of the purchase program have rights to the cash flows from the underlying mortgages. As such, the initial outflow of government funds to purchase the MBS would be offset by ongoing cash inflows represented by the monthly mortgage payments. Further, the government eventually may be able to sell the assets, though whether at a gain or loss will remain to be seen. While incremental borrowing to obtain the funds necessary to purchase the MBS may add to the United States public debt, the net effect will be considerably less as the incremental debt will be offset to a large extent by the MBS assets.
A key challenge would be valuing the purchase price of the MBS, which is a complex exercise subject to a multitude of variables related to the housing market and the credit quality of the underlying mortgages. The ability of the government to offset the purchase price (through mortgage collections over the long-run) depends on the valuation assigned to the MBS at the time of purchase. For example, Merrill Lynch wrote down the value of its MBS to approximately 22 cents on the dollar in Q2 2008. Whether the government is ultimately able to resell the assets above the purchase price or will continue to merely collect the mortgage payments is an open item.
On February 10, 2009, the newly confirmed Secretary of the Treasury Timothy Geithner
Timothy Franz Geithner (; born August 18, 1961) is a former American central banker who served as the 75th United States Secretary of the Treasury under President Barack Obama from 2009 to 2013. He was the President of the Federal Reserve Bank ...
outlined his plan to use the $300 billion or so dollars remaining in the TARP funds. He mentioned that the U.S. Treasury and Federal Reserve wanted to help fund private investors to buy toxic assets from banks, but few details have yet been released. There is still some skepticism about the premise that taxpayers can buy troubled assets without having to overpay. Oppenheimer & Company analyst Meridith Whitney argues that banks will not sell bad assets at fair market values because they are reluctant to take asset write downs. Removing toxic assets would also reduce the volatility of banks' stock prices. Because stock is a call option
In finance, a call option, often simply labeled a "call", is a contract between the buyer and the seller of the call option to exchange a security at a set price. The buyer of the call option has the right, but not the obligation, to buy an ...
on a firm's assets, this lost volatility will hurt the stock price of distressed banks. Therefore, such banks will only sell toxic assets at above market prices.
On April 6, 2008, the State Foreclosure Prevention Working Group reported that the pace of foreclosures exceeded the capacity of homeowner rescue programs, such as the Hope Now Alliance, in the first quarter of 2008.
Sweeping powers
The original plan would have granted the Secretary of the Treasury unlimited power to spend, proofing his or her actions against congressional or judicial review. Section 8 of the Paulson proposal states: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency." This provision was not included in the final version.
Rationale for the bailout
Government officials
In his testimony before the U.S. Senate, Treasury Secretary Henry Paulson summarized the rationale for the bailout:
*Stabilize the economy: "We must... avoid a continuing series of financial institution failures and frozen credit markets that threaten American families' financial well-being, the viability of businesses both small and large, and the very health of our economy."
*Improve liquidity: "These bad loans have created a chain reaction and last week our credit markets froze – even some Main Street non-financial companies had trouble financing their normal business operations. If that situation were to persist, it would threaten all parts of our economy."
*Comprehensive strategy: "We must now take further, decisive action to fundamentally and comprehensively address the root cause of this turmoil. And that root cause is the housing correction which has resulted in illiquid mortgage-related assets that are choking off the flow of credit which is so vitally important to our economy. We must address this underlying problem, and restore confidence in our financial markets and financial institutions so they can perform their mission of supporting future prosperity and growth."
*Immediate and significant: "This troubled asset relief program has to be properly designed for immediate implementation and be sufficiently large to have maximum impact and restore market confidence. It must also protect the taxpayer to the maximum extent possible, and include provisions that ensure transparency and oversight while also ensuring the program can be implemented quickly and run effectively."
*Broad impact: "This troubled asset purchase program on its own is the single most effective thing we can do to help homeowners, the American people and stimulate our economy."
In his testimony before the U.S. Senate on September 23, 2008, Fed Chairman Ben Bernanke
Ben Shalom Bernanke ( ; born December 13, 1953) is an American economist who served as the 14th chairman of the Federal Reserve from 2006 to 2014. After leaving the Fed, he was appointed a distinguished fellow at the Brookings Institution. Duri ...
also summarized the rationale for the bailout:
*Investor confidence: "Among the firms under the greatest pressure were Fannie Mae and Freddie Mac, Lehman Brothers, and, more recently, American International Group
American International Group, Inc. (AIG) is an American multinational finance and insurance corporation with operations in more than 80 countries and jurisdictions. , AIG companies employed 49,600 people.https://www.aig.com/content/dam/aig/amer ...
(AIG). As investors lost confidence in them, these companies saw their access to liquidity and capital markets increasingly impaired and their stock prices drop sharply." He also stated: "Purchasing impaired assets will create liquidity and promote price discovery in the markets for these assets, while reducing investor uncertainty about the current value and prospects of financial institutions. More generally, removing these assets from institutions' balance sheets will help to restore confidence in our financial markets and enable banks and other institutions to raise capital and to expand credit to support economic growth."
*Impact on the economy and GDP: "Extraordinarily turbulent conditions in global financial markets... these conditions caused equity prices to fall sharply, the cost of short-term credit—where available—to spike upward, and liquidity to dry up in many markets. Losses at a large money market mutual fund sparked extensive withdrawals from a number of such funds. A marked increase in the demand for safe assets—a flight to quality—sent the yield on Treasury bills down to a few hundredths of a percent. By further reducing asset values and potentially restricting the flow of credit to households and businesses, these developments pose a direct threat to economic growth."
Regarding the $700 billion number, ''Forbes.com'' quoted a Treasury spokeswoman: "It's not based on any particular data point. We just wanted to choose a really large number."
Journalists
According to CNBC commentator Jim Cramer
James Joseph Cramer (born February 10, 1955) is an American television personality and author. He is the host of ''Mad Money'' on CNBC and an anchor on ''Squawk on the Street''. A former hedge fund manager, founder, and senior partner of Crame ...
, large corporations, institutions, and wealthy investors were pulling their money out of bank money market funds, in favor of government-backed Treasury bills. Cramer called it "an invisible run on the banks," one that has no lines in the lobby but pushes banks to the breaking point nonetheless. As a bank's capital reserve of deposits evaporate, so too does its ability to lend and correspondingly make money. "The lack of confidence inspired by Lehman's demise, the general poor health of many banks, this is going to turn this into an intractable moment," Cramer said, "if someone in the government doesn't start pushing for more deposit insurance."
Reaction to the initial proposal
Skepticism regarding the plan occurred early on in the House. Many members of Congress
A Member of Congress (MOC) is a person who has been appointed or elected and inducted into an official body called a congress, typically to represent a particular constituency in a legislature. The term member of parliament (MP) is an equivalen ...
, including the House of Representatives, did not support the plan initially, mainly conservative free-market Republicans and liberal anti-corporate Democrats. Alabama Republican Spencer Bachus
Spencer Thomas Bachus III (born December 28, 1947) is an American politician. He is a former U.S. Representative for the state of Alabama, serving from 1993 to 2015. A member of the Republican Party, he served as ranking member (2007–2011) a ...
has called the proposal "a gun to our head."
Immediate market reactions
On September 19, 2008, when news of the bailout proposal emerged, the U.S. stock market rose by 3%. Foreign stock markets also surged, and foreign currencies corrected slightly, after having dropped earlier in the month. The value of the U.S. dollar
The United States dollar ( symbol: $; code: USD; also abbreviated US$ or U.S. Dollar, to distinguish it from other dollar-denominated currencies; referred to as the dollar, U.S. dollar, American dollar, or colloquially buck) is the official ...
dropped compared to other world currencies after the plan was announced. The front end oil futures contract spiked more than $25 a barrel during the day Monday September 22, ending the day up over $16. This was a record for the biggest one-day gain. However, there are other factors that caused the massive spike in oil prices. Traders who got "caught" at the end of the October contract session were forced to purchase oil in large batches to cover themselves, adding to the surge in prices. Further out, oil futures contracts rose by about $5 per barrel. Mortgage rates increased following the news of the bailout plan. The 30-year fixed-rate mortgage
A fixed-rate mortgage (FRM) is a mortgage loan where the interest rate on the note remains the same through the term of the loan, as opposed to loans where the interest rate may adjust or "float". As a result, payment amounts and the duration of th ...
averaged 5.78% in the week before the plan was announced; for the week ending September 25, the average rate was 6.09%, still far below the average rate during the early 1990s recession
The early 1990s recession describes the period of economic downturn affecting much of the Western world in the early 1990s. The impacts of the recession contributed in part to the 1992 U.S. presidential election victory of Bill Clinton over inc ...
, when it topped 9.0%.
Potential conflict of interest
There was concern that the current plan created a conflict of interest for Paulson. Paulson was a former CEO of Goldman Sachs, which stood to benefit from the bailout. Paulson had hired Goldman executives as advisors and Paulson's former advisors had joined banks that were also to benefit from the bailout. Furthermore, the original proposal exempted Paulson from judicial oversight
Judicial review is a process under which executive, legislative and administrative actions are subject to review by the judiciary. A court with authority for judicial review may invalidate laws, acts and governmental actions that are incomp ...
. Thus, there was concern that former illegal activity by a financial institution or its executives might be hidden.
The Treasury staff member responsible for administering the bailout funds was Neel Kashkari, a former vice-president at Goldman Sachs.
In the Senate, Senator Judd Gregg
Judd Alan Gregg (born February 14, 1947) is an American politician and lawyer who served as the 76th governor of New Hampshire from 1989 to 1993 and was a United States senator from New Hampshire; in the Senate, Gregg served as chairman of the S ...
(R-NH) was the leading Republican author of the TARP program while he had a multimillion-dollar investment in the Bank of America.
Views from the public, politicians, financiers, economists, and journalists
The public
Protests opposing the bailout occurred in over 100 cities across the United States on Thursday September 25. Grassroots group TrueMajority TrueMajority was a progressive advocacy group in the United States. In September 2007, TrueMajority and its related organization TrueMajorityACTION merged with USAction. By 2008, the combined groups had over 700,000 members, making it, together wi ...
said its members organized over 251 events in more than 41 states. The largest gathering has been in New York City, where more than 1,000 protesters gathered near the New York Stock Exchange along with labor union members organized by New York Central Labor Council. Other grassroots groups have planned rallies to protest against the bailout, while outraged citizens continue to express their opposition online through blogs and dedicated web sites.
* In a survey conducted September 19–22 by the Pew Research Center, by a margin of 57 percent to 30 percent, Americans supported the bailout when asked "As you may know, the government is potentially investing billions to try and keep financial institutions and markets secure. Do you think this is the right thing or the wrong thing for the government to be doing?"
* In a survey conducted September 19–22 by Bloomberg Bloomberg may refer to:
People
* Daniel J. Bloomberg (1905–1984), audio engineer
* Georgina Bloomberg (born 1983), professional equestrian
* Michael Bloomberg (born 1942), American businessman and founder of Bloomberg L.P.; politician and ...
/'' Los Angeles Times'', by a margin of 55 percent to 31 percent, Americans opposed the bailout when asked whether "the government should use taxpayers' dollars to rescue ailing private financial firms whose collapse could have adverse effects on the economy and market, or is it not the government's responsibility to bail out private companies with taxpayers' dollars?".
* In a survey conducted September 24 by '' USA Today''/Gallup
Gallup may refer to:
* Gallup, Inc., a firm founded by George Gallup, well known for its opinion poll
* Gallup (surname), a surname
*Gallup, New Mexico, a city in New Mexico, United States
** Gallup station, an Amtrak train in downtown Gallup, New ...
, when asked "As you may know, the Bush administration has proposed a plan that would allow the Treasury Department to buy and re-sell up to $700 billion of distressed assets from financial companies. What would you like to see Congress do?", 56 percent of respondents wanted Congress to pass a plan different from the original Paulson proposal, 22 percent supported the Paulson proposal in its initial form, and 11 percent wanted Congress to take no action.
* Senator Sherrod Brown said he had been getting 2,000 e-mail messages and telephone calls a day, roughly 95 percent opposed.
* As of Thursday September 25, Senator Dianne Feinstein's (D-Calif.) offices had received a total of 39,180 e-mails, calls and letters on the bailout, with the overwhelming majority of constituents against it.["Public isn't buying Wall Street bailout"](_blank)
'' Los Angeles Times'', September 26, 2008.
Politicians
Supporters of the plan included presidential candidates Barack Obama
Barack Hussein Obama II ( ; born August 4, 1961) is an American politician who served as the 44th president of the United States from 2009 to 2017. A member of the Democratic Party, Obama was the first African-American president of the U ...
and John McCain, and British Prime Minister
The prime minister of the United Kingdom is the head of government of the United Kingdom. The prime minister advises the sovereign on the exercise of much of the royal prerogative, chairs the Cabinet and selects its ministers. As modern p ...
Gordon Brown
James Gordon Brown (born 20 February 1951) is a British former politician who served as Prime Minister of the United Kingdom and Leader of the Labour Party from 2007 to 2010. He previously served as Chancellor of the Exchequer in Tony B ...
.
Critics included Senator Bernie Sanders
Bernard Sanders (born September8, 1941) is an American politician who has served as the junior United States senator from Vermont since 2007. He was the U.S. representative for the state's at-large congressional district from 1991 to 200 ...
, Former Arkansas Governor Mike Huckabee, Congressman Ron Paul, Libertarian presidential candidate Bob Barr
Robert Laurence Barr Jr. (born November 5, 1948) is an American attorney and politician. He served as a federal prosecutor and as a Congressman. He represented Georgia's 7th congressional district as a Republican from 1995 to 2003. Barr attai ...
, and Senators Christopher Dodd
Christopher John Dodd (born May 27, 1944) is an American lobbyist, lawyer, and Democratic Party politician who served as a United States senator from Connecticut from 1981 to 2011. Dodd is the longest-serving senator in Connecticut's history. ...
, Richard Shelby
Richard Craig Shelby (born May 6, 1934) is an American lawyer and politician serving as the senior United States senator from Alabama. First elected to the U.S. Senate in 1986 as a Democrat who later switched to the Republican Party in 1994, he ...
, and Jim Bunning.[Ahrens, Frank]
"Senate Goes After Regulators Past, Present"
'' The Washington Post'', September 23, 2008.
In a '' Wall Street Journal'' opinion piece, Senator Hillary Clinton advocated addressing the rate of mortgage defaults and foreclosures that ignited this crisis, not just bailing out Wall Street firms: "If we do not take action to address the crisis facing borrowers, we'll never solve the crisis facing lenders." She proposed a new Home Owners' Loan Corporation
The Home Owners' Loan Corporation (HOLC) was a government-sponsored corporation created as part of the New Deal. The corporation was established in 1933 by the Home Owners' Loan Corporation Act under the leadership of President Franklin D. Roo ...
(HOLC), similar to that used after the Depression and which was launched in 1933. The new HOLC was to administer a national program to help homeowners refinance their mortgages. She also called for a moratorium on foreclosures and freezing of rate hikes in adjustable-rate mortgages.[ Clinton, Hillary Rodham]
Let's Keep People In Their Homes
The Wall Street Journal, September 25, 2008.
Barack Obama
Barack Hussein Obama II ( ; born August 4, 1961) is an American politician who served as the 44th president of the United States from 2009 to 2017. A member of the Democratic Party, Obama was the first African-American president of the U ...
, the Democratic presidential candidate, said that any bailout had to include plans to recover the money, protect working families and big financial institutions, and be crafted to prevent such a crisis from happening again.
Financiers
Former Federal Reserve Chairman Alan Greenspan
Alan Greenspan (born March 6, 1926) is an American economist who served as the 13th chairman of the Federal Reserve from 1987 to 2006. He works as a private adviser and provides consulting for firms through his company, Greenspan Associates LLC. ...
supported the Paulson plan.[Jagger, Suzy]
"Henry Paulson hailed as a hero for stemming market slide, but all are not convinced"
'' The Times'', September 20, 2008.
Investor Warren Buffett
Warren Edward Buffett ( ; born August 30, 1930) is an American business magnate, investor, and philanthropist. He is currently the chairman and CEO of Berkshire Hathaway. He is one of the most successful investors in the world and has a net ...
says he could put in $10B plus $90B nonrecourse debt Nonrecourse debt or a nonrecourse loan (sometimes hyphenated as non-recourse) is a secured loan (debt) that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable. If the borrower defau ...
; that is, without having to repay beyond $10B if mortgages did not repay. (This is 10 to 1 leverage, 10 times upside with 1 times downside.) He also said that the government should pay market price, which may be below the carry value. Buffett says "I would think they might insist on the directors of the institutions that participate in this program waiving all director's fees for a couple of years. They should, maybe, eliminate bonuses." Buffett says "if someone wants to sell a hundred billion of these instruments to the Treasury, let them sell two or three billion in the market and then have the Treasury match that, ... . You don't want the Treasury to be a patsy
Patsy is a given name often used as a diminutive of the feminine given name Patricia or sometimes the masculine name Patrick, or occasionally other names containing the syllable "Pat" (such as Cleopatra, Patience, Patrice, or Patricia). Among I ...
." Mr. Buffett's company owns financial companies which will benefit directly or indirectly.
Investor George Soros opposed the original Paulson plan: "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 called Barack Obama
Barack Hussein Obama II ( ; born August 4, 1961) is an American politician who served as the 44th president of the United States from 2009 to 2017. A member of the Democratic Party, Obama was the first African-American president of the U ...
's list of conditions for the plan "the right principles".
Other critics included Carl Icahn
Carl Celian Icahn (; born February 16, 1936) is an American financier. He is the founder and controlling shareholder of Icahn Enterprises, a public company and diversified conglomerate holding company based in Sunny Isles Beach. Icahn takes l ...
Jim Rogers, and William Seidman. Seidman compared the bailout with action he and his team at the Resolution Trust Corporation took during the savings and loan crisis of the 1980s: "What we did, we took over the bank, nationalized it, fired the management, took out the bad assets and put a good bank back in the system."
Economists
In hindsight, economists generally agree that unemployment would have been significantly higher without the program.
Journalists
* '' The Economist'' magazine said that although "Mr Paulson's plan is not perfect ... it is good enough" and that "Congress should pass it—and soon."
* "The deal proposed by Paulson is nothing short of outrageous. It includes no oversight of his own closed-door operations. It merely gives congressional blessing and funding to what he has already been doing, ad hoc." - Robert Kuttner[
]
*Journalist Rosalind Resnick favors a hypothetical scenario in which "consumers and businesses would be able to borrow at the fed funds rate at 2 percent, just like the big banks do. This means that every cash-strapped homeowner would be able to refinance his mortgage and cut his payments in half, saving thousands of homes from foreclosure. Consumers could also refinance their credit card balances, auto loans and other debt at interest rates they can afford" and that this ''plan'' "would cost U.S. taxpayers absolutely nothing." She does not address how the Federal Reserve would manage the US population's mortgages, credit cards and auto loans in practice.
Alternative proposals
Suggested alternative approaches to address the issues underlying the financial crisis include: mortgage assistance proposals try to increase the value of the asset base while limiting the disruption of foreclosure; bank recapitalization through equity investment by the government; asset liquidity approaches to engage market mechanisms for valuing troubled assets; and financial market reforms promoting transparency and conservatism to restore trust by market investors.
Mortgage assistance
*Conservative Republican Representatives had offered a mortgage insurance plan as an alternative to the bailout. There had been speculation that U.S. Senator John McCain may have supported this plan but this was not confirmed.
*Senator Hillary Clinton has proposed a new Home Owners' Loan Corporation
The Home Owners' Loan Corporation (HOLC) was a government-sponsored corporation created as part of the New Deal. The corporation was established in 1933 by the Home Owners' Loan Corporation Act under the leadership of President Franklin D. Roo ...
(HOLC), similar to that used after the Depression, which was launched in 1933. The new HOLC would administer a national program to help homeowners refinance their mortgages. She also called for a moratorium on foreclosures and freezing of rate hikes in adjustable rate mortgages.
*Jonathan Koppell, Associate Professor of Politics and Management at the Yale School of Management, recommends assisting homeowners by lowering interest rates on loans in default. The money spent would be repaid from profits when the homes eventually sell after the housing market has recovered.
Bank recapitalization
* A ten-point plan by New York University economist Nouriel Roubini
Nouriel Roubini (born March 9 1958) is a Turkish-born Iranian-American economist. He is Professor Emeritus (2021–present) and was Professor of Economics (1995–2021) at the Stern School of Business, New York University, and also chairman of Ro ...
goes beyond a Home Owners' Loan Corporation
The Home Owners' Loan Corporation (HOLC) was a government-sponsored corporation created as part of the New Deal. The corporation was established in 1933 by the Home Owners' Loan Corporation Act under the leadership of President Franklin D. Roo ...
to include recreating a combination of a Resolution Trust Corporation, and a Reconstruction Finance Corporation The Reconstruction Finance Corporation was a government corporation administered by the United States Federal Government between 1932 and 1957 that provided financial support to state and local governments and made loans to banks, railroads, mortgag ...
. Roubini has advocated bank recapitalization (by providing cash in exchange for preferred shares) and suspending all dividend payments.[Our Choice. Nouriel Roubini. October 9, 2008. Forbes](_blank)
/ref>
*Economist Paul Krugman recommended equity investments in the banks, an approach similar to what happened during the S&L crisis, the GSE bailout, and the 1990s Swedish banking rescue
Swedish or ' may refer to:
Anything from or related to Sweden, a country in Northern Europe. Or, specifically:
* Swedish language, a North Germanic language spoken primarily in Sweden and Finland
** Swedish alphabet, the official alphabet used by ...
. This avoids the valuation questions involved in the direct purchase of MBS.
*The first half of the bailout money was primarily used to buy preferred stock in banks instead of troubled mortgage assets. This has led some economists to argue that buying preferred stock will be far less effective than buying common stock.
*Luigi Zingales, Professor of Entrepreneurship and Finance at the University of Chicago, has proposed a special chapter of the bankruptcy code to convert banks' debt to equity which would improve capital adequacy ratios and enable a return to lending.
* Janet Tavakoli, a financial consultant and a former adjunct professor of derivatives at the University of Chicago's Graduate School of Business, criticizes the bailout because in her view it hides problems and continues price uncertainty. She also advocates forced restructuring, with a combination of debt forgiveness and debt for equity swaps, rather than a bailout.
Asset liquidity
*Christopher Ricciardi, former Merrill Lynch banker, wrote a letter to Treasury Secretary Henry M. Paulson Jr. proposing alternatively that the government should be backing some troubled assets to encourage private investors to purchase them — as opposed to the direct purchase of troubled assets from financial institutions.
*Investor Warren Buffett
Warren Edward Buffett ( ; born August 30, 1930) is an American business magnate, investor, and philanthropist. He is currently the chairman and CEO of Berkshire Hathaway. He is one of the most successful investors in the world and has a net ...
believes the government should pay market price for the assets rather than an artificially high hold-to-maturity price. The market price would be determined by selling a portion of the assets to private investors.
Financial market reform
* Dominique Strauss-Kahn, Managing Director of the International Monetary Fund, has recommended three near-term actions to assist banks: provision of liquidity, purchase of distressed assets, and recapitalization. In addition, he argues for addressing the structural issues with more prudential regulation, better accounting rules, and more transparency.
Monetary consensus reform
This process consisted of nationalizing most of the private industries. The short-term effects were evidently costly, but the beneficiary repercussions were vastly favorable to a sustainable economic future.
# Nationalize the federal reserve.
# Deregulate the corporate image of the United States.
# The rest of the proposal were equated with different variables and would have been acted upon according to the circumstances.
According to Jon Daemon, the proposal was dismissed by bureaucrats and lobbyist in accordance to the private banks and federal reserve dispatchers.
Legislative history
Over the weekend (September 27–28), Congress continued to develop the proposal. That next Monday, the House put the resulting effort, the Emergency Economic Stabilization Act of 2008, to a vote. It did not pass. US stock markets dropped 8 percent, the largest percentage drop since Black Monday in 1987.
Congressional leaders, including both presidential candidates, started working with the Bush Administration and the Treasury department on key negotiation points as they worked to finalize the plan. Key items under discussion included:[Vekshin, Alison]
"Paulson, Lawmakers Narrowing Differences, Frank Says"
Bloomberg.com
Bloomberg News (originally Bloomberg Business News) is an international news agency headquartered in New York City and a division of Bloomberg L.P. Content produced by Bloomberg News is disseminated through Bloomberg Terminals, Bloomberg Televi ...
, September 22, 2008.[Rowley, James and Alison Vekshi]
"House Republicans Undercut Bush on Rescue, Slow Talks"
, Bloomberg.com
Bloomberg News (originally Bloomberg Business News) is an international news agency headquartered in New York City and a division of Bloomberg L.P. Content produced by Bloomberg News is disseminated through Bloomberg Terminals, Bloomberg Televi ...
, September 26, 2008.
*Additional foreclosure avoidance and homeowner assistance
*Executive pay limits
*Government equity interests in firms participating in program, to provide additional taxpayer protection
*Judicial review, Congressional oversight and right to audit
*Structure and authority of the entities that will manage the program
First House vote, September 29
Just after midnight Sunday, September 28, leaders of the Senate and House, along with Treasury Secretary Paulson, announced a tentative deal had been reached to permit the government purchase of up to $700 billion in mortgage backed securities to provide liquidity to the security holders, and to stabilize U.S. financial firms and markets. The bill was made final later that Monday morning.[
The bill as voted on September 29, 2008 was an amendment substituting the text of the "Emergency Economic Stabilization Act of 2008": into H.R. 3997, a bill with an entirely different legislative histor]
Amendment to the Senate Amendment to H.R. 3997
House Committee on Financial Services (retrieved September 30, 2008). See also the committee's press release links
Emergency Economic Stabilization Act of 2008
.
A debate and vote was scheduled for the House for Monday, September 29, to be followed by a Senate debate on Wednesday. In an early morning news conference, on Monday September 29, President George W. Bush expressed confidence that the bill would pass Congress, and that it would provide relief to the U.S. economy. A number of House Republicans remained opposed to the deal and intended to vote against it.
That same day, the legislation for the bailout was put before the United States House of Representatives and failed 205–228, with one not voting. Democrats voted 140–95 in favor of the legislation, while Republicans voted 133–65 against it.[
] During the legislative session, at the conclusion of the vote, the presiding chair declared the measure, HR3997, to be unfinished business. Republican, said a bailout plan could still pass Congress. Dodd said: "We don't intend to leave here without the job being done. While it may take another few days, we're confident that can happen."
until 2018. The $1.2 trillion loss in market value received much media attention, although it still does not rank among the index's ten largest drops in percentage terms. The S & P lost 8.8%, its seventh worst day in percentage terms and its worst day since
in 1987. The NASDAQ composite also had its worst day since Black Monday, losing 9.1% in its third worst day ever. The
, the difference between what banks charge each other for a three-month loan and what the Treasury charges, hit a 26-year high of 3.58%; a higher rate for inter bank loans than Treasury loans is a sign that banks fear that their fellow banks won't be able to pay off their debts. Meanwhile, the price of U.S.
for November delivery fell $10.52 to $96.37 a barrel, its second largest one-day drop ever, on expectations of an economic slowdown reducing oil consumption and demand.
The Dow Jones industrial average recovered 485 points or about 62% of the entire loss the very next day.
Markets which had expected the bill to pass and had moved on to debating whether it would be sufficient were already skittish after news that
to avoid collapse. The events were compounded by news from Europe that Dutch-Belgian
billions to ensure its survival.