Fearing the consequences of more delay in responding to failing financial institutions, frozen credit, and falling stock prices, Congress enacted legislation to throw up to $700 billion at the problem, albeit with somewhat less abandon than originally proposed by Treasury Secretary Henry Paulson. After the House surprised observers by rejecting the deal negotiated on a bipartisan basis, the Senate passed a similar bill with a few significant additions. To reduce the threat of a run on banks, the financial plan added an increase in the size of insured deposits in banks covered by the Federal Deposit Insurance Corporation (FDIC) from $100,000 to $250,000 per account. The Senate also added its $150 billion package of extended tax cuts, new tax incentives for renewable energy, and an improvement in the Child Tax Credit, as well as the bill requiring mental health parity in health insurance plans (see articles about the tax package and the mental health provisions in this issue). The Senate bill passed 75-24 on October 1.
Proponents of more substantial aid for homeowners and more teeth in the requirement that the federal government gain an ownership share of financial institutions bailed out by the bill wanted to see those improvements included in the new version. Adding such provisions would have attracted some of the progressive Members of the House who opposed the bill when it was defeated in the House on Monday, September 29. Instead, the leadership in both House and Senate emphasized the need for more Republican votes (only 65 House Republicans supported the bill when it went down on the 29 th ). Despite a vigorous push for a change to allow home mortgages to be renegotiated as part of court bankruptcy proceedings as well as efforts to include economic recovery measures such as an extension of unemployment benefits, no additional forms of help for ” Main Street ” were included.

Even though the bill emerging from the Senate did not substantially strengthen protections for taxpayers and homeowners or help with economic recovery, more House Democrats switched their votes from no to yes than did House Republicans (32 Democrats switched; 26 Republicans did). The final vote for the Emergency Economic Stabilization Act of 2008 ( H.R. 1424) was 263-171, on October 3. The President signed the bill the same day.

What the Legislation Does

– Purchase of Assets: Authorizes the purchase of mortgages and securities made up of pooled mortgages by the U.S. Treasury Secretary. Through the new Troubled Asset Relief Program (TARP), the Treasury Secretary and his designees can buy up $250 billion in bad loans immediately, plus another $100 billion with a certificate from the President calling for the purchase. The remaining $350 billion can be disapproved by Congress (although their vote can be vetoed by the President).

– Oversight: Two panels, one of federal banking regulators and Cabinet officials and another made up of five Members of Congress will review the purchase of assets. In addition, a new inspector general within the Treasury Department will monitor activities.

– Help for Financial Institutions: In addition to the purchase of their weak assets, banks who purchased stock in Fannie Mae and Freddie Mac may count losses from these holdings against current income, a more favorable tax treatment than writing the losses off over time. The law also allows the Securities and Exchange Commission to suspend an accounting rule that requires financial institutions to include the current market value of the assets they hold in their balance sheets. Because the current value is so low, this rule forces banks and others to maintain higher reserves to offset the risk. By suspending it, the hope is money will be freed up for new loans, thereby easing the credit crunch. In addition, the Treasury must create a voluntary long-term insurance program for mortgage-backed securities.

– Protections from Foreclosure: The Treasury must establish a plan to reduce foreclosures and to encourage companies servicing mortgages to modify loans to make payments affordable by homeowners. Loan guarantees and other measures intended to prevent foreclosure are options available, but not required.

– Protections for Renters: The Treasury Secretary is encouraged to permit tenants current in their rent to remain in homes subject to foreclosure. When the Treasury purchases foreclosed rental properties, it must protect current rental subsidies (such as the Section 8 program) and retain federal, state, and local renter protections.

– Help for Taxpayers: If after five years the government’s sale of the assets purchased under TARP results in losses, the President must submit a plan to Congress to recover costs from the financial industry. In addition, the law requires an equity (ownership) stake by government in companies getting bailouts, intended to protect taxpayers from losses. Some question how much teeth there is in the equity requirement.

– Executive Pay: CEO’s and top officials of companies getting help from TARP face limits on compensation. Other high-paid traders working for the firm are not subject to these limits.

– Deposit Insurance: As noted above, FDIC insurance is increased to $250,000 per account, up from $100,000.

What the Legislation Does Not Do

– Provide Adequate Prevention of Foreclosures: Although the law as enacted added some protections, many analysts see them as relatively toothless. Homeowners would be better protected if courts could modify loans in their favor in a Chapter 13 bankruptcy proceeding. The financial industry hotly opposed this, even though mortgages on vacation homes and other luxury property can be modified in bankruptcy court. Other measures, such as blanket mortgage rate reductions, would have strengthened foreclosure prevention.

– Provide a Boost to the Economy: Despite nine months of job losses and 800,000 exhausting their extended unemployment benefits on Sunday, October 5, Congress neither included within this bill nor enacted separately urgently needed economic recovery measures. Advocates had sought a further extension of unemployment insurance, aid to states to prevent cuts in Medicaid, child support, and other services, a temporary increase in Food Stamps, infrastructure repair, jobs for youth, and other measures to create or protect jobs, alleviate hardship, and put money back into the economy. The House and Senate each approved such a package but could not come to final agreement. The House also overwhelmingly passed an unemployment benefit extension on the last day of the session, but the Senate failed to do so because the bill required unanimous consent to move forward, and Senator Allard (R-CO) withheld his.

Alarms and Diversions

Service providers are seeing the consequences of the financial crisis in their states and communities, with states like California and Massachusetts unable to do even routine short-term borrowing and many states starting to cut services. Emergency food centers report huge increases in demand and shortages in food supplies. A 90 year old woman in Akron , Ohio shot herself in the chest when deputies arrived to serve eviction papers from her foreclosed home, a grim reminder of the impact of the millions of foreclosures affecting homeowners, disproportionately low-income. While recovering from her wounds, Fannie Mae forgave her loan so she can return to her home (http://www.cnn.com/2008/US/10/03/eviction.suicide.attempt/index.html ). Surely there is a better way to address unaffordable mortgages.

Advocates are learning quickly about the causes of the current crisis and how to reduce the damage while preventing taxpayers from footing too much of the bill. They are also having to dispel wild attempts by the right-wing to divert blame to the Community Reinvestment Act (CRA) and to the grass roots organization ACORN (Association of Community Organizations for Reform Now). The CRA is a law passed in the late 1970s to require banks and savings and loans to provide services, including loans, in low-income communities, as a means of redressing previous failure to invest in those communities. Banks and savings and loans were not the source of the irresponsible subprime lending that was one of the causes of the current problem. CRA requirements do not apply to the newer financial institutions that made the subprime loans. Similarly, right-wing Members of Congress and media have made utterly wrong accusations that a provision which would have allowed a portion of the returns from the sale of assets to be placed in the Housing Trust Fund would have gone to ACORN. First, that provision was not included in the final bill. Second, as drafted, groups seeking funds for development of housing would have to apply for grants from the Trust Fund. ACORN has an arm that provides housing counseling, but they do not develop housing and doubted they would even have applied for the funding. These disturbing attempts at “spin” have been refuted by multiple sources, including the organization Media Matters ( http://mediamatters.org/items/200810010019?f=s_search ) and Newsweek (http://www.newsweek.com/id/162789 ).

Next Steps

Both House and Senate leaders have announced they will be back for a post-election session in mid-November. Speaker Pelosi has made several public statements in favor of taking action on economic recovery items during this period, and Majority Leader Reid has also favored action on such a package. With 9.5 million unemployed, the highest since 1992, an underemployment rate of 11 percent, and a rising proportion of the jobless out of work six months or more, Congress may try to act in a lame duck session. Similarly, if the financial rescue package has not worked to ease credit and stop the stock market plunge, Congress may try to revisit that package as well.

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