The Senate will vote today on a multibillion-dollar financial services rescue package, using the House-passed mental health parity bill as the vehicle and attaching Senate-passed tax extender legislation and a proposal to increase limits on the FDIC insurance program.
The Senate will call up the House mental health parity bill, then substitute the economic rescue plan as an amendment from Senate Banking Chairman Christopher Dodd.
"This is one of the finer moments in the Senate. We have come together on a bipartisan [basis] and structured a way forward on an important rescue package for our country," Senate Minority Leader McConnell said on the floor Tuesday evening.
The bill will be subject to a 60-vote threshold for passage. The rescue package was defeated in the House Monday, 228-205.
One sticking point is that House Democratic leaders have vehemently opposed the Senate's tax extender legislation, instead pushing their extender legislation in parts that are -- except for an alternative minimum tax patch and disaster aid -- offset.
House Majority Leader Hoyer has said attaching the extenders legislation to the bailout would not be helpful.
However, the Senate's extender legislation is popular with House Republicans, who voted in droves against the bailout package Monday.
"Adding this tax relief will ensure that regular working Americans get the financial help they need in this time of crisis. ... Senators and representatives can know that a 'yes' vote on the financial rescue plan is now a vote to rescue America's working families from this financial crisis, with the right tax relief at just the right time," Senate Finance Chairman Max Baucus said.
A spokesman said House Minority Leader Boehner was consulted about the new package, "gave it the green light," and said it should be passed.
As lawmakers and the administration worked on the bill Tuesday, the FDIC proposal gained quick currency as a sweetener -- but attracted scorn from economists and from bankers.
"There is a sense among some members that they would like to see some sweeteners so they can vote for it," said a senior Democratic leadership aide.
The FDIC asked the House Financial Services Committee Tuesday for the authority to increase bank deposit insurance limits.
The concept was backed Tuesday by the two parties' presidential nominees: Sens. Barack Obama, D-Ill., and John McCain, R-Ariz., who called for the current $100,000 limit to be raised to $250,000. McCain, Obama and his running mate, Sen. Joseph Biden, D-Del., have said they will return to Washington for today's vote.
The FDIC's request was confirmed by House Financial Services Chairman Barney Frank in a memorandum Tuesday to panel Democrats that was obtained by CongressDaily.
"Sheila Bair, Chair of the Federal Deposit Insurance Corporation, has notified me that they will be requesting authority to increase the deposit insurance limit," it said. "We will provide additional details as we have them."
Supporters of raising the cap contend it would give depositors confidence in the banking system and prevent runs on banks by customers and businesses.
But some believe the FDIC request does not address the causes of the underlying credit crunch and could make the situation worse.
Floyd Stoner, chief lobbyist for the American Bankers Association, stressed that it is a complicated issue that must be addressed correctly once a course of action is determined.
"There are a lot of discussions going on about deposit insurance, and we are involved in all of them," Stoner said. "These are complex issues, and if there are changes addressed by the stabilization bill, we need to be sure we get it right. Unfortunately, what right is has yet to be determined."
George G. Kaufman, a co-chairman of the Shadow Financial Regulatory Committee and the John F. Smith Professor of Finance and Economics at Loyola University Chicago, said "If FDIC insurance limits are raised, banks would have a greater incentive to embark in riskier behavior because their depositors would be less vigilant." Kaufman added that the larger the increase, the more potential for disaster.
He also said increasing FDIC insurance limits will not address the underlying issue of increasing liquidity in the credit markets, the main problem affecting the economy.
Princeton Economist Alan Blinder, in a document dated Tuesday, also spoke out against a possible increase in the FDIC insurance limit, echoing Kaufman's moral hazard argument.
Blinder, a former vice chairman of the board of governors at the Federal Reserve, also questioned what boosting the cap would do for the crux of the crisis.
"The basic underlying problems are falling house prices, foreclosures, and bad loans and securities sitting on the books -- which is what the $700 billion bailout bill was aimed at," said Blinder. "The other huge problem at present is the unwillingness of banks to lend to one another. More deposit insurance does nothing to address any of those problems. Furthermore, much of the panicky deposit outflows have actually come from insured depositors. People are afraid and don't want their money tied up."
Another factor at play in the bailout package negotiations is the SEC's announcement Tuesday that it would be soon offering additional guidance on mark-to-market accounting rules.
Accounting industry lobbyists are set to oppose an effort by House Republicans to codify the SEC's effort in the bailout. Senate Democrats also balked at the idea of changing the rules when it was broached by Republicans in earlier negotiations.
It also remains unclear just how many more lawmakers would back the package if either the SEC codification or FDIC insurance increase is included in an updated package.
One potential downside is that the FDIC insurance program is funded by bank fees, with any increase in the monies banks will be required to provide being passed on to consumers.
Sources close to Tuesday's informal negotiations said adding an extension of unemployment insurance was also being considered to gain more Democratic support.
"I'm quite confident we're moving in the right direction, and that we should end up with a very positive result within the next 24 to 48 hours," said Dodd.
This article appears in the October 4, 2008 edition of NJ Daily.
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