October 3rd, 2008 11:11 AM by Lehel Szucs
By Christopher Stern and Laura Litvan
Oct. 3 (Bloomberg) -- Congress passed a $700 billion financial-market rescue plan designed to unlock credit markets, reversing a rejection that sent global stock markets plunging and threatened to worsen an economic slowdown.
The legislation, a bipartisan effort to restore confidence in the nation's banking system, authorizes the government to buy troubled assets from financial institutions reeling from record home foreclosures. The bill contains $149 billion in tax breaks and affirms regulators' power to suspend asset-valuing rules that companies blame for fueling the crisis.
President George W. Bush wants to sign the bill into law ``as quickly as possible,'' White House spokesman Tony Fratto said before the vote. Bush will make a statement at 1:55 p.m. Washington time.
The House approved the measure in a 263-171 vote, four days after rejecting an earlier version. The bill's defeat on Sept. 29 caused a 778-point drop in the Dow Jones Industrial Average, prompting dozens of lawmakers to reverse their vote on the legislation, the government's largest intervention in the markets since Franklin Roosevelt's New Deal.
`Stopping the Panic'
``The issue is stopping the panic,'' said Adam Posen, deputy director of the Peterson Institute for International Economics in Washington. ``The plan's not perfect, but it's certainly better than doing nothing. Now Treasury has to be very aggressive about purchasing a wide range of assets very quickly.''
The Dow Jones Industrial Average rose 120.35 points, or 1.2 percent, to 10,603.2 at 1:38 p.m. in New York.
House Majority Leader Steny Hoyer, a Maryland Democrat, said the bill is ``critical to stabilizing our economy.''
Bush made more than a dozen phone calls to Republican lawmakers to lobby for the bill. The bill was backed by 172 Democrats and 91 Republicans. Over two-thirds of Democrats voted for the measure while fewer than half of Republicans supported it. On Sept. 29, the 140 Democrats voting for the plan were joined by 65 Republicans.
``The stock-market drop on Monday served as a wake-up call to a lot of people,'' said Representative John Yarmuth, a Kentucky Democrat who announced today he was switching his vote in favor of the bailout plan.
House leaders, who said they wouldn't set a vote on the revised measure unless they were sure it would pass, decided to go forward with the debate after conferring last night.
A group of Republicans last night tried to offer an alternative that would spend only $250 billion until the end of the year.
Representative Spencer Bachus said that out of ``prudence'' Congress should appropriate only the $50 billion a month the Treasury could distribute this year.
The Democratic-controlled Rules Committee rejected the amendment, saying any changes to the measure would require Senate action, delaying the start of the program. The Senate approved the legislation on Wednesday.
Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke proposed last month the largest intervention in financial markets since the Great Depression, in a three-page outline.
They said it was needed to prevent the spread of economic turmoil sparked by a record number of home foreclosures. Among the victims were Lehman Brothers Holdings Inc., which was forced into bankruptcy last month, and Fannie Mae, Freddie Mac and American International Group Inc., which were taken over by the government.
Paulson last week urged Congress to immediately give him almost unchecked legislative authority to take action. Lawmakers responded by demanding increased oversight, more aid to prevent foreclosures and limits on executive compensation at companies that benefit from the program.
Bush endorsed the plan, saying it is needed to prevent a painful recession.
Credit-market turmoil is hitting local governments. U.S. states and municipalities have managed to sell about $700 million of tax-exempt bonds this week, less than 15 percent of a typical week's new fixed-rate issues.
California Governor Arnold Schwarzenegger wrote Paulson last night, saying that his and other states may need emergency federal loans to maintain government operations if the credit crunch continues.
``This credit crisis has the power to grind the U.S. economy to a halt,'' Schwarzenegger wrote in a letter e-mailed to Paulson.
Companies lobbied in support of the rescue measure. Automakers said tougher loan standards partly accounted for a 27 percent plunge in U.S. auto sales last month.
The market for commercial paper, short-term borrowing by businesses, suffered the biggest one-week drop on record, the Federal Reserve said yesterday. The amount of commercial paper outstanding fell by $94.9 billion, or 5.6 percent, during the week ended Oct. 1.
``This is not a bailout for Wall Street anymore,'' Carolyn McCarthy, a New York Democrat who represents suburbs near New York City, said on the House floor this morning. ``This is about the small stores on Main Street.''
Still, House lawmakers earlier this week rejected the agreement that congressional leaders reached with the administration, with many saying it was too risky and costly.
The Senate then sweetened the package -- and enlarged the legislation to 450 pages -- by linking the rescue plan to a temporary increase in the limit on federal deposit insurance to $250,000 from $100,000.
The Senate also tied the package to a two-year extension of tax breaks that will save individuals and corporations about $149 billion over the next decade, a move popular among House Republicans. The provisions include $17 billion in credits for the development of solar, wind and other forms of renewable energy.
Democrat Barack Obama and Republican John McCain returned from the presidential-campaign trail to vote for the plan in the Senate this week.
The Senate bill also reiterates the U.S. Securities and Exchange Commission's authority to suspend an accounting rule that bankers and other corporate executives say exacerbates their troubles.
The so-called fair-value standard requires companies to review assets and report losses if their values decline. Lawmakers, the American Bankers Association and companies including American International Group Inc. have urged the SEC to suspend or ease the rule, saying it forces firms to report deeper losses than needed on assets such as subprime mortgages.
To contact the reporters on this story: Laura Litvan in Washington at firstname.lastname@example.org