House Says No Way, Market Plummets
- Sep 29, 2008
In a shocking turn of events, the U.S. House of Representatives voted down the Bush administration’s proposed $700 billion financial system bailout package. The stock market tumbled in the wake of the news, with the Dow Jones index closing the day down a massive 778 points, its largest point drop ever.Hammered out in late night weekend meetings in a bipartisan effort among republican and democratic House and Senate leaders and administration officials, the “Emergency Economic Stabilization Act of 2008” aimed to stave off a crisis termed the greatest economic threat since the Great Depression. The vote was 227 to 206 against the bill. Of the 227 that voted no, 133 were republicans and 94 were democrats. The yes vote was made up of 141 democrats and 65 republicans. In a prepared statement, President Bush said he was “very disappointed” in the vote. The bill aimed to solve what observers call a systemic lack of liquidity in the credit markets, which affect the commercial real estate market. “The problem will eventually be solved, but how long will it take?” asked Hessam Nadji, managing director of research with Marcus & Millichap Real Estate Investment Services, who spoke with CPN shortly after the news broke. “The uncertainty about timing is the key problem. The more uncertainty in the capital markets, the more damage to the economy.” That in turn hurts fundamentals like occupancies and rents, which drive the commercial real estate market, continued Nadji. As uncertainty and delay put more pressure on the economy and more jobs are lost, the pressure increases on commercial real estate fundamentals. Most industries face similar problems as the fundamentals that drive them bump up against the credit crisis. As the result of the vote became clear, the stock market slid from about negative 400 to negative 700 in a matter of moments. A brief bounce brought the market back to about 400 again. From there it started back down again, at a slower pace. By 3:30 P.M. EST, the market had entered record loss territory with the Dow down 720.65 points. An angry three-hour debate in the House preceded the vote and hinted at the eventual resolution. Conservative republicans ridiculed the bill. Representative Paul Broun, a republican from Ga., said, “This is a huge cow patty with a piece of marshmallow stuck in the middle. I’m not going to eat that cow paddy.” Some democrats spoke against the bill as well. “Four hundred eminent economists including three Nobel Prize winners oppose this legislation,” said Representative Brad Sherman, a democrat from Calif. “Too much bailout and not enough workout,” said Representative Jeb Hensarling, a republican from Dallas. Hensarling also warned that the bill was a step onto the “slippery slope toward socialism.” “Action or inaction today is a false choice,” argued Representative Lloyd Doggett, a democrat from Texas. “We’re handing over $700 billion to the administration that created this crisis.” The republican leadership spoke in favor of the bill, with Minority Leader John Boehner, a republican from Ohio urging his party to vote for the measure. “What is in the best interest of our country? Vote yes,” he said. Majority leader Steny Hoyer, a democrat from Maryland said: “Most days aren’t like today. This is a day when the democratic leader rises to follow the republican leader and both speak with one voice because America faces a crisis.” After the vote, republicans blamed Speaker of the House Nancy Pelosi for inflaming partisan politics in a scathing attack on the Bush administration just before the vote. “When President Bush took office, he inherited President Clinton’s budget surpluses,” she said. “With reckless economic policies, he turned that around. With an anything goes mentality, we are where we are today. With no regulation, no supervision, and if you fail, you will have a golden parachute. Those days are over.” Responding to the charge that the Speaker had caused the measure to be rejected, Barney Frank, the democratic representative from Massachusetts and chairman of the Financial Services Committee, said: “There is terrible crisis affecting the economy. But because someone hurt their feelings, they are going to punish the country? There were supposedly 12 republican members that changed their votes. In one of the great ironies, the number of republicans that had their feelings hurt turned out to be exactly the number of votes needed to reverse the vote.” The rejected plan would have provided $700 billion in funds, in installments starting with $250 billion and followed by another $100 billion, if approved by the President. The President could request the next $350 billion, but the Congress could refuse to release the remaining money. The secretary of the Treasury would establish a Troubled Asset Relief Program (TARP) to purchase the assets, working in consultation with the Board of Governors of the Federal Reserve, the FDIC, Comptroller of the Currency, the director of the Office of Thrift Supervision and the secretary of Housing and Urban Development. The secretary would also establish a form of insurance that bailout participants could buy and hold as guarantees of troubled assets. A Financial Stability Oversight Board would monitor actions taken under TARP, with the goal of ensuring that TARP policies protected taxpayers. The act would have also required the secretary to report on the state of the financial markets before next April. Additional oversight measures would include a bipartisan Congressional panel, a special inspector general, audits by the General Accountability Office and public disclosure of money spent. Executives of firms participating in the program would have steep taxes levied on salary amounts over $500,000 per year. Participating firms would also have to turn over warrants granting stock in the companies to Congress, a measure designed to enable taxpayers to share as owners in any success the firms achieve after getting rid of the so-called toxic securities. To assist homeowners having trouble paying their mortgages, the bill would have empowered the secretary to encourage companies to minimize foreclosures by making reasonable modifications to loans.