The House today rejected the largest federal government bailout to shore up shaky credit markets that threaten to bring the U.S. economy to standstill, leaving lawmakers scrambling to find a way to revive a plan for the Treasury Department to purchase up to $700 billion in bad mortgage debt and other assets. The House rejected the bill 228-205, triggering a drop of more than 700 points in the Dow Jones Industrial Average. House Republicans opposed the bill 133-65, going against all of their leadership, the Bush administration and major business organizations. House Democrats favored it 140-95. Because the Senate had been expected to pass it, the House vote was seen as the key test. White House Deputy Press Secretary Tony Fratto said President Bush was "very disappointed" by the outcome.
House Financial Services Barney Frank noted that members had to take a tough vote in which they will not get any credit just five weeks before Election Day. But he said that inaction would cause credit markets to be frozen, which would shut down the ability of consumers and businesses to get credit. "If we defeat this bill today, it will be a very bad day for the financial sector of the American economy. The people who will feel the pain are not the top bankers or the top corporate executives, but average Americans," Frank said. During 10 frantic days of work, congressional negotiators added brakes to the program such as limiting the funding to be paid out into installments, restricting executive pay for firms to participate and allowing the federal government to get an equity stake in the firms. But many liberal Democrats complained that it was a bailout to Wall Street firms that helped contribute to subprime crisis, especially since a pro-consumer change in bankruptcy law was dropped by negotiators. Frank tried to rebut such claims by noting the measure would require Treasury to take significant steps to modify troubled mortgages it purchases and listing the low-income advocacy groups that were in favor it.
But the major challenge was on the Republican side, where many members argued the bill went against their free-market ideology and would allow Treasury to effectively nationalize some at-risk financial institutions. "There will always be time and pretext enough for people to compromise their principles and put forward poor public policy that may in the short run be popular, but in the long run will be detrimental to long-term interests of the American people," said Rep. Thaddeus McCotter, R-Mich. Other Republicans took on a more populist bent. "This is a huge cow patty with a piece of marshmallow stuck in the middle of it. And I'm not going to eat that cow patty," said Rep. Paul Broun, R-Ga.
After the vote, Democratic leaders huddled in House Speaker Pelosi's office to discuss the next step and GOP leaders were expected to meet as well. Majority Whip Clyburn noted that 60 percent of Democrats voted for the measure, and added: "Do the math." House Minority Leader Boehner, who gave an impassioned speech for the measure, said afterwards, "I don't know that we know the path forward at this time." Both sides said claimed the failure was the fault of the other.
This article appears in the October 4, 2008, edition of National Journal Daily PM Update.