Plan B: The Lure of Pork Barrels
The housing market has been a cancer on the nation's economy. Illiquid mortgage assets have brought the collapse of banks and financial institutions, crippled growth and led to a credit crunch that continues to exasperate the effects of the toxin. Casualties continue to mount up with Bear Sterns, Lehman Brothers, Fannie Mae, Freddie Mac, Indy Mac, Wachovia, Washington Mutual, AIG, Merrill Lynch, Countrywide and a growing list of others that have bled out hundreds of billions of dollars from the financial foundation.
Beginning last year, the Federal Reserve Board launched an offensive, slashing rates, holding emergency meetings and developing vehicles like the Term Auction Facility (TAF), which has been ramped up substantially to $300 billion per month from its now seemingly miniscule $20 billion origins, with the Fed wanting to inject $900 billion of new liquidity into the banking system by year's end. But the moves were apparently too late; the sickness had spread. Municipal securities and bonds faltered, auction rate securities markets completely froze and off-balance sheet investment vehicles were written down as debt bundles containing mortgage assets were discovered to be a widespread infection.
Banks reined in lending terms with their customers and with each other. Terms like "panic" and "crisis" were used more frequently and eventually became apt.
As September inched toward a close, salvation was hailed in the form of a joint Central Bank and Department of Treasury $700 billion economic bailout plan that sought to simply wipe mortgage-related assets, whole loans and other blockages from the financial bloodstream. The plan was to have the government absorb those troubled assets by purchasing them from entities, relieving institutions of their pressures so that business could return to normal.
Democrats panned it as a "blank check" for Wall Street. Republicans called it "risky" with "no guarantee of success," but after long hours of negotiation between Congressional leaders, the Fed and the Department of Treasury, it appeared the largest bailout plan in the nation's history would become a reality.
Then Monday arrived and the House surprisingly torpedoed the recovery package. It's hard not to speculate that members did an about-face on a bill that they were expected to pass because November 4th is nigh. Many have to go back home and rev up their campaigns for re-election. Following the House vote, the stock market tumbled 777 points, which appeared to serve as a notice of urgency to lawmakers.
The bill had stumbled in the House, but the Senate remained.
Presidential hopefuls Senators Barack Obama (D-IL) and John McCain (R-AZ) left the campaign trail to give floor speeches and herald the bill's passage. In a matter of hours, the Senate overwhelmingly adopted the 2008 Emergency Economic Stabilization Act (EESA) and, before sending it back to the House for a second vote, they took time to stuff the legislation full of tax breaks and sweeteners to lure Representatives from "Nay" to "Yea."
The plan worked. Fifty-nine legislators—26 Republicans and 33 Democrats—were persuaded to switch their votes. And on Friday, the House did not touch any part of the text of the Senate version of the bill and passed it 263-171, a substantial turnaround from Monday's vote of 228-205.
"This is only the first step," said Representative Rahm Emanuel (D-IL). "The middle class is working harder, earning less and paying more. In the last seven years, median household income has dropped $1200 and costs for energy, health care, as well as college education have gone up $4800." The economic recovery package includes Emanuel's capital gains tax gap legislation that he has fought for three years to get passed.
The bailout plan establishes the Troubled Asset Relief Program, which gives the Treasury Department the power of buy up to $700 billion worth of mortgage-related assets over the next two years. The EESA would also require the Treasury to modify troubled loans, such as predatory loans like subprime mortgages, wherever possible. Countrywide, now a cog in the Bank of America behemoth, began similar maneuvers on Monday for its own delinquent mortgage holders. The EESA also directs all federal agencies to modify loans that they own or control.
To ensure taxpayer protection, the legislation requires companies that sell their assets to the government to provide warrants so that taxpayers will benefit from any future growth these companies may experience. And the bill would also require the President to submit legislation that would cover any losses to taxpayers resulting from the bailout. The federal insurance for bank deposits will also be temporarily increased from $100,000 to $250,000.
Fed Chairman Ben Bernanke applauded the Congressional action, saying, "It demonstrates the government's commitment to do what it takes to support and strengthen our economy. The legislation is a critical step towards stabilizing our financial markets and ensuring an uninterrupted flow of credit to households and businesses."
But, the EESA is bloated with pork barrels and tax breaks worth over $108 billion over the next year. It includes an exemption of an excise tax of 39 cents on the first sale of certain wooden shafts used for children's arrows. There is also an amendment that allows racecar track owners to write-off the cost of their facilities on taxes over seven years, not to mention a rebate against excise taxes charged on rums imported from Puerto Rico and the Virgin Islands and a sales tax deduction from federal taxes for residents of Texas, Nevada, Florida, Washington and Wyoming. There are extensions of research credits, a Payment In Lieu of Taxes (PILT) package for rural schools, a tax break for Exxon Valdez plaintiffs, wool duty refunds and an economic development credit for American Samoa. And, in an effort to keep film and television production companies in the U.S., the EESA includes $478 million in tax incentives for them.
"Hard choices have to be made," said Rep. Diane Watson (D-CA). "My initial reaction to the $700 billion request from the Administration to stabilize the credit markets was suspended disbelief." Watson, who has been a supporter of the film and television tax provisions for many years, threw her support for the EESA on Friday.
Treasury Secretary Henry Paulson said that his agency will move rapidly to implement the new authorities that it has been granted. It is not buying all mortgage-related assets from every institution. To help facilitate the process so the government isn't stuck holding a bag of worthless assets of its own, the Treasury Department will add more financial analysts, asset managers and attorneys to its staff.
"There is no one-size-fits-all solution to alleviating the stress in our financial system," said Paulson. "Each situation will be different and we must implement these new programs with a strategy that allows us to adapt to changing circumstances and conditions and attract private capital. The broad authorities in this legislation, when combined with existing regulatory authorities and resources, give us the ability to protect and recapitalize our financial system as we work through the stresses in our credit markets."
Key for Democrats was that the EESA will not allow executives of companies selling their troubled assets to the government to walk away unscathed. In order to participate in the bailout program, companies must forfeit certain tax benefits and in some cases, limit executive pay. It also cuts the strings on "golden parachutes" and requires all unearned bonuses to be returned.
Matthew Carr, NACM staff writer
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