Bailout Update

by Erin Abrams (New York City)

What a difference a week makes. After the rejection of the bailout by the House on Monday, September 29th and watching the Dow plummet 777 points in a single day, a beefed up version of the legislation passed the Senate on Wednesday, October 1st and the House on Friday, October 3rd. President Bush signed the bill into law on that same day. Both senators running for president, Barack Obama and John McCain, returned from the campaign trail to Washington, where they expressed their support for the bill.

The plan to spend $700 billion in federal tax to buy the mortgage-backed securities debt of struggling companies has been met with mixed reactions from investors and the financial media. The pervasive hope that underscored Congressional urgency to pass the plan was that the bailout would allow the beleaguered companies to clear the problematic debt off if their books, so that they no longer had to mark these distressed assets to market and continue to incur losses. Proponents of the bill, such as Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke argued before the Senate Banking Committee that this will have the short-term impact of loosening up credit markets enabling banks and other institutional investors to once again borrow much needed funds.

To make it more palatable to those reluctant congressmen and women, the bill was loaded with “pork” ranging from tax breaks for the middle class to more obscure benefits for more specialized groups. MSNBC reported that “tucked into pages 262 and 263 of the bill, for example, are provisions that will aid the manufacturers of ‘certain wooden arrows designed for use by children.’ The bill will exempt the arrows from an excise tax of 39 cents. There are also tax breaks for race-track owners, for rum imported from Puerto Rico, for worsted wool makers, Hollywood film and television production companies and on and on.” You can check out the rest of the deal “sweeteners” incorporated into the bill right here.

Many are wondering where the money to pay for the $700 billion bailout – let alone the “pork” – will come from, fearing that the middle class taxpayers will ultimately bear a disproportionate share of the burden. To prevent this, Senator Bernie Sanders put forth an amendment in the Senate that would have imposed a five-year, 10 percent surtax on income over $1 million a year for couples and over $500,000 for single taxpayers. required Wall Street to foot the bill. The Amendment failed when put to a voice vote.

Wherever the money ultimately comes from, the real issue will be whether the bailout will have the desired effect. Experts disagree on how long, if ever, it will take for the bailout plan to lubricate the credit markets and jumpstart the economy. Banks have been hoarding cash, even though they have plenty on hand, out of fears about the economy, and inter-bank lending has ground to a halt. Inter-bank borrowing is necessary for both day-to-day operations like payroll and long run growth related projects and deals. The idea is that the package will calm the markets and help credit to start flowing more freely. The plan will cost about $700 billion, and much has been made of that number. However, the big question is how much the Treasury department will pay for these assets, as pricing the now-defunct securities is a difficult task. Secretary Paulson has 45 days to put a plan in place.

Until then, we will all be watching and waiting for signs of hope. But it didn’t come on Monday as the Dow closed below 10,000 for the first time in four years.