Michael Emilio

In a historical moment today, the Dow Jones Industrial index has fallen 778 points which is the most ever for a single day.

That’s not all either. To further the damage, NASDAQ has fallen 200 points (a 9% drop) and the S&P 500 has dropped 107 points (a 9% drop). Even the London Stock Exchange FTSE 100 fell 5%.

This shocking turn of events began with the House of Representatives announcing that they have rejected President George W. Bush’s massive $700 billion dollar emergency rescue bailout for the financial system of the United States with a vote of 228 to 205. 133 Republicans and 95 Democrats voted against the bill, with 65 Republicans and 140 Democrats voting for the bill. This rejection came even after impassioned urgings from the president and leaders of both parties, Democrat and Republican. The fears center around the belief that the American economy will freefall without it.

“I’m disappointed in the vote. … We’ve put forth a plan that was big because we’ve got a big problem,” said United States President George W. Bush.

The Reason For The Bailout Bill

The legislation – named the Emergency Economic Stabilization Act of 2008 (EESA) – is meant to permit the United States government to purchase bad mortgages and other assets gone wrong away from lenders, banks, and other financial institutions. These loans have almost destroyed the American banking system, case-in-point the Washington Mutual (WaMu) melt-down. Washington Mutual, Inc. – while buried in debt due to massive business and lending mistakes – filed for Chapter 11 bankruptcy and was purchased JPMorgan Chase for $1.9 billion dollars in what is widely considered the largest bank failure in modern American history. Wachovia has also been purchased by Citigroup for $2.1 billion dollars – a move put together by federal regulators.

This essentially creates only two large banks in the entire United States – JPMorgan Chase and Citigroup.

“I’m going to be talking to my economic advisers … and we’ll be working with leaders of Congress on the way forward,” said President Bush.

By removing these debts off the books of these banks, the plan was to improve their balance sheets. These debts are chokepoints and constaints on these lenders that once lifted, were expected to assist these banks to continue to lend money and eventually lift the banking system out of its hole.

“Democrats, Republicans, step up to the plate, get it done,” said Senator and Presidential Candidate Barack Obama.

In fact, both presidential candidates – John McCain and Barack Obama – issued a joint statement urging the House to pass the bill: “Now is a time to come together – Democrats and Republicans – in a spirit of cooperation for the sake of the American people. The plan that has been submitted to Congress by the Bush administration is flawed, but the effort to protect the American economy must not fail.”

Why the Bailout Proposal Failed

The question that circulates around the business and political world is whether or not the bailout bill was knocked out by leadership failure or due to spite. Are political leaders on both sides to blame for not getting their members in line? Was it due to Nancy Pelosi’s controversial pre-vote speech, thus prompting some members to vote against the bill in order to send a message?

The prevailing attitude to the general public is to not panic – a deal is expected to happen… eventually.

Download the entire 109 page PDF document of the Emergency Economic Stabilization Act of 2008.

(click to enlarge)

Emergency Economic Stabilization Act Official Summary

I. Stabilizing the Economy
The Emergency Economic Stabilization Act of 2008 (EESA) provides up to $700 billion to the Secretary of the Treasury to buy mortgages and other assets that are clogging the balance sheets of financial institutions and making it difficult for working families, small businesses, and other companies to access credit, which is vital to a strong and stable economy. EESA also establishes a program that would allow companies to insure their troubled assets.

II. Homeownership Preservation
EESA requires the Treasury to modify troubled loans – many the result of predatory lending practices – wherever possible to help American families keep their homes. It also directs other federal agencies to modify loans that they own or control. Finally, it improves the HOPE for Homeowners program by expanding eligibility and increasing the tools available to the Department of Housing and Urban Development to help more families keep their homes.

III. Taxpayer Protection
Taxpayers should not be expected to pay for Wall Street’s mistakes. The legislation requires companies that sell some of their bad assets to the government to provide warrants so that taxpayers will benefit from any future growth these companies may experience as a result of participation in this program. The legislation also requires the President to submit legislation that would cover any losses to taxpayers resulting from this program from financial institutions.

IV. No Windfalls for Executives
Executives who made bad decisions should not be allowed to dump their bad assets on the government, and then walk away with millions of dollars in bonuses. In order to participate in this program, companies will lose certain tax benefits and, in some cases, must limit executive pay. In addition, the bill limits “golden parachutes” and requires that unearned bonuses be returned.

V. Strong Oversight
Rather than giving the Treasury all the funds at once, the legislation gives the Treasury $250 billion immediately, then requires the President to certify that additional funds are needed ($100 billion, then $350 billion subject to Congressional disapproval). The Treasury must report on the use of the funds and the progress in addressing the crisis. EESA also establishes an Oversight Board so that the Treasury cannot act in an arbitrary manner. It also establishes a special inspector general to protect against waste, fraud and abuse.

Listing of All House Representative Votes

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