In a surprise move to resurrect President Bush's $700 billion Wall Street rescue plan, Senate leaders slated a vote on the measure for today – but added a tax cut plan already rejected by the House.
Majority Leader Harry Reid, D-Nev., and GOP Leader Mitch McConnell of Kentucky unveiled the plan Tuesday. The Senate plan would also raise federal deposit insurance limits to $250,000 from $100,000, as called for by the two presidential nominees just hours earlier.
Wall Street seemed to regain hope, as the Dow Jones industrials rose 485 points, one day after a record 778-point plunge following rejection in the U.S. House of the plan worked out by congressional leaders and the Bush administration.
The move to add a tax legislation – including a set of business tax breaks – risked a backlash from House Democrats insisting they be paid for with tax increases elsewhere.
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But by also adding legislation to prevent more than 20million middle-class taxpayers from feeling the bite of the alternative minimum tax, the step could build momentum for the Wall Street bailout from House Republicans.
The surprise move capped a day in which supporters of the rescue plan fought to bring it back to life, courting reluctant lawmakers with a variety of other sweeteners including the plan to reassure Americans their bank deposits are safe.
Before Reid and McConnell's move, lawmakers, President Bush and the two rivals to succeed him sought ideas new and old that might work to change a dozen House members' votes and pass the $700billion plan.
The tax plan passed the Senate last week, on a 93-2 vote. It included AMT relief, $8 billion in tax relief for those hit by natural disasters in the Midwest, Texas and Louisiana, and some $78 billion in renewable energy incentives and extensions of expiring tax breaks. In a compromise worked out with Republicans, the bill does not pay for the AMT and disaster provisions but does have revenue offsets for part of the energy and extension measures.
That wasn't enough for the House, which insisted that there be complete offsets for the energy and extension part of the package.
The Senate move seems aimed at jamming the House into accepting the deficit-financed tax cuts. Conservative Democrats won't like the idea, but some Congress-watchers suspect most Democrats might be willing to go along.
Still, the House is where the problems are, and leaders there were looking for ideas that might appeal to a few of the 133 Republicans and 95 Democrats who rejected the proposal on Monday.
Senate Banking Committee Chairman Christopher Dodd, D-Conn., said, “I'm told a number of people who voted ‘no' … are having serious second thoughts about it.” He added, however, “There's no game plan that's been decided.”
The idea drawing the biggest support was to raise the federal deposit insurance limit, now $100,000 per account, to $250,000. Several officials, including presidential nominees John McCain and Barack Obama, endorsed the change.
So did the agency that runs the program.
Within hours of each candidates' statements, Federal Deposit Insurance Corp. chairman Sheila Bair asked Congress for temporary authority to raise the limit by an unspecified amount. That could help ease a crisis of confidence in the banking system, Bair said.
She said the overwhelming majority of banks remain sound but an increase in the cap would help ease a crisis of confidence in the banking system as well as encourage banks to begin more lending.
Other ideas include extending unemployment insurance benefits, typically a Democratic goal, but one that appeals to some Rust Belt Republicans. Another Democratic-backed idea would double the property tax deduction taken by people who do not itemize their taxes. And another calls for more spending on transportation infrastructure projects, which would create more jobs. Budget hawks in both parties might object, however.
Monday's House vote was a stinging setback to leaders of both parties and to Bush. The administration's proposal, still the heart of the legislation under consideration, would allow the government to buy bad mortgages and other deficient assets held by troubled financial institutions. If successful, advocates of the plan believe, that would help lift a major weight off the already sputtering national economy.
But the proposal ignited angry calls from thousands of Americans, who flooded congressional telephones. The House voted 228-205 against the plan. Some lawmakers reported a shift in constituent calls pouring into their offices Tuesday after the record stock market decline. Many callers, they said, want Congress to do something without “bailing out Wall Street.”
Bush renewed his efforts, speaking with McCain and Obama and making another statement from the White House. “Congress must act,” he declared.
Though stock prices rose, more attention was on credit markets. A key rate that banks charge each other shot higher, further evidence of a tightening of credit availability.
Bush was talking about everyday Americans on Tuesday, not banks or other financial institutions. And no supporters were using the word “bailout.”
The president noted that the maximum $700 billion in the proposed bill was dwarfed by the $1 trillion in lost wealth that resulted from Monday's stock market decline.
“The dramatic drop in the stock market that we saw yesterday will have a direct impact on retirement accounts, pension funds and personal savings of millions of our citizens,” Bush said. “And if our nation continues on this course, the economic damage will be painful and lasting.”
Republicans said the FDIC proposal might attract lawmakers on the left and right who want to help small business owners and avert runs on banks by customers fearful of losing their savings.
Another possible change to the bill would call on regulators to modify “mark to market” accounting rules. Such rules require banks and other financial institutions to adjust the value of their assets to reflect current market prices, even if they plan to hold the assets for years.
Some House Republicans say current rules forced banks to report huge paper losses on mortgage-backed securities, which might have been avoided.
One Republican familiar with the discussions conceded it amounted to step toward deregulation at a time when Obama, McCain and House members in both parties are clamoring for greater controls on the financial industry.
The bill's defeat in the House came despite personal lobbying by Bush and support from House leaders of both parties. But ideological groups on the left and the right lined up against it. Even pressure in favor of the bill from some of the biggest special interests in Washington, including the U.S. Chamber of Commerce and the National Association of Realtors, could not sway enough votes.