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Revised $700B bailout plan passes Senate, House

October 08, 2008
Following a shocking "no" vote from the U.S. House of Representatives on Monday, Sept. 29, with regards to the proposed $700-billion bailout plan, Washington and Wall Street alike were faced with their share of problems last week.

After the 207-226 failure in the House, investors responded immediately by pulling their money out of the market, causing the Dow Jones to drop an unprecedented 777 points, the second largest single-day point drop in the history of the index.

The original bailout plan that the house voted down was designed to grant the Secretary of Treasury the power to purchase troubled assets, most notably mortgage-related assets, with government money through a new program known as the Troubled Asset Relief Program (TARP). In this way, the government is able to keep lenders afloat until, ideally, it is able to sell the assets back to the companies for a profit that can then be transferred onto the taxpayers.

The $700 billion number was set as the maximum amount that the Secretary is allowed to have outstanding at any one time. However, the money is not given to the secretary all at once but rather in phases as it is needed.

The secretary is first granted $250 billion and then only receives an additional $100 billion with the certification of the president. Congress can deny an additional request of $350 billion through a joint resolution, but if it fails to do so within 15 days, then the secretary's purchasing ceiling is set to $700 billion.

In addition to the Secretary of Treasury's new purchasing power, the bill also included a Congressional oversight board, the position of Special Investigator General and allows the Comptroller General to conduct regular audits of the TARP.

Other provisions included the requirement of the Treasury Department to make rules that prevent executives of companies that benefit from the bailout from receiving excessive compensation and to cap deductibility of executive pay packages at $500,000 for companies that receive $300 million or more from TARP.

The House voted this bill down, but it didn't take long for it to be resuscitated. Faced with an increasingly urgent situation, the White House appealed to the Senate to revive the bailout bill in a way that would ensure its passage. The resulting new bill, which passed the Senate 74-25 last Wednesday and the House 263-171 on Friday, is laden with "sweeteners" that were included to appeal to both House Democrats and Republicans. The core legislation, however, mostly remained the same with the exception of raising the FDIC insurance limit from $100,000 to $250,000.

The "sweeteners" tacked onto the bailout bill are mostly year-long extensions on various tax relief programs for individuals and businesses proposed by President Bush that were due to expire, but others include relief money for disaster areas in the Gulf and in the Midwest due to extensive flooding and hurricane damage, increasing the Alternative Minimum Tax exemption amount by about $3,000 to shield more than 20 million taxpayers from paying the AMT and requiring health plans to make coverage for mental health and addiction treatment equitable to other medical coverage.

While proponents of the bill are optimistic, it may take up to a month to see of the effects of the bill on the economy. In the meantime, the global market continues to sell-off in attempt to rake together sufficient capital in a time when many banks are having trouble getting a hold of cash due to increased inter-bank lending rates. The Dow Jones nosedive of a record 800 points on Monday before recovering was evidence of this.

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Schuler Bauer
Barbara Shaw
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