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 This article is about one division of an enacted statute. For the entire statute, see Public Law 110-343. For the enacted rescue program, see Troubled Assets Relief Program.
The Emergency Economic Stabilization Act of 2008, commonly referred to as a bailout of the U.S. financial system, is a law enacted in response to the global financial crisis of 2008 authorizing the United States Secretary of the Treasury to spend up to US$700 billion to purchase distressed assets, especially mortgage-backed securities, and make capital injections into banks.[1][2] The bailed-out banks are mostly U.S. or foreign banks, though the Federal Reserve extended help to American Express, whose bank-holding application it recently approved.[3] The Act was proposed by Treasury Secretary Henry Paulson during the global financial crisis of 2008. The original proposal was three pages, as submitted to the United States House of Representatives. The purpose of the plan was to purchase bad assets, reduce uncertainty regarding the worth of the remaining assets, and restore confidence in the credit markets. The text of the proposed law was expanded to 110 pages and was put forward as an amendment to H.R. 3997.[4] The amendment was rejected via a vote of the House of Representatives on September 29, 2008, by a margin of 228-205.[5] On October 1, 2008, the Senate debated and voted on an amendment to H.R. 1424, which substituted a newly revised version of the Emergency Economic Stabilization Act of 2008 for the language of H.R. 1424.[6][7] The Senate accepted the amendment and passed the entire amended bill by a vote of 74-25.[8] Additional unrelated provisions added an estimated $150 billion to the cost of the package and increased the size of the bill to 451 pages.[9][10] See Public Law 110-343 for details on the added provisions. The amended version of H.R. 1424 was sent to the House for consideration, and on October 3, the House voted 263-171 to enact the bill into law.[6][11][12] President Bush signed the bill into law within hours of its enactment, creating a $700 billion Troubled Assets Relief Program to purchase failing bank assets.[13] Supporters of the bailout plan argued that the market intervention called for by the plan was vital to prevent further erosion of confidence in the U.S. credit markets and that failure to act could lead to an economic depression. Opponents objected to the massive cost of the sudden plan, pointing to polls that showed little support among the public for bailing out Wall Street investment banks,[14] and claimed that better alternatives were not considered[15] and that the Senate only tried to force the passage of the unpopular but sweetened version of the bailout through the opposing House and was successful in this attempt.[16][17] Opponents of the rescue plan also argue that since the problems of the American economy were created by excess credit and debt, a massive infusion of credit and debt into the economy only excaberates the problems with the economy: the bailout infuses credit and debt into the economy but, because the government is creating the money out of thin air, immediately creates more credit and debt.[18] [edit] Economic backgroundThe subprime mortgage crisis reached a critical stage during September 2008, characterized by severely contracted liquidity in the global credit markets[19] and insolvency threats to investment banks and other institutions. In response, the U.S. government announced a series of comprehensive steps to address the problems, following a series of "one-off" or "case-by-case" decisions to intervene or not, such as the $85 billion liquidity facility for American International Group on September 16, the federal takeover of Fannie Mae and Freddie Mac, and the bankruptcy of Lehman Brothers. On Monday, October 6, the DOW Jones industrials dropped more than 700 points and fell below 10,000 for the first time in four years.[20] The same day, CNN reported these worldwide stock market events:[21]
[edit] Paulson proposalU.S. Treasury Secretary Henry Paulson proposed a plan under which the U.S. Treasury would acquire up to $700 billion worth of mortgage-backed securities.[22] The plan was immediately backed by President George W. Bush and negotiations began with leaders in the U.S. Congress to draft appropriate legislation. 
Consultations among Treasury Secretary Henry Paulson, Chairman of the Federal Reserve Ben Bernanke, U.S. Securities and Exchange Commission chairman Christopher Cox, congressional leaders, and President George W. Bush, moved forward efforts to draft a proposal for a comprehensive solution to the problems created by illiquid assets. News of the coming plan resulted in some stock, bond, and currency markets stability on September 19, 2008.[24][25] The proposal called for the federal government to buy up to US$700 billion of illiquid mortgage-backed securities with the intent to increase the liquidity of the secondary mortgage markets and reduce potential losses encountered by financial institutions owning the securities. The draft proposal was received favorably by investors in the stock market, but caused the U.S. dollar to fall against gold, the Euro, and petroleum. The plan was not immediately approved by Congress; debate and amendments were seen as likely before the plan was to receive legislative enactment.[26][27][28] Throughout the week of September 20, 2008 there was in fact contentious wrangling among members of Congress over the terms and scope of the bailout,[29] amplified by continued failures of institutions like Washington Mutual, and the upcoming November 4 national election.
The plan was introduced on September 20 by U.S. Treasury Secretary Henry Paulson. Named the Troubled Asset Relief Program,[22] but also known as the Paulson Proposal or Paulson Plan, it should not be confused with Paulson's earlier 212-page plan, the Blueprint for a Modernized Financial Regulatory Reform,[34] which was released on March 31, 2008. The proposal was only three pages long, intentionally short on details to facilitate quick passage by Congress.[35] [edit] Mortgage asset purchasesA key part of the proposal is the federal government's plan to buy up to US$700 billion of illiquid mortgage backed securities (MBS) with the intent to increase the liquidity of the secondary mortgage markets and reduce potential losses encountered by financial institutions owning the securities. The draft proposal of the plan was received favorably by investors in the stock market.[26][36] This plan can be described as a risky investment, as opposed to an expense. The MBS within the scope of the purchase program have rights to the cash flows from the underlying mortgages. As such, the initial outflow of government funds to purchase the MBS would be offset by ongoing cash inflows represented by the monthly mortgage payments. Further, the government eventually may be able to sell the assets, though whether at a gain or loss will remain to be seen. While incremental borrowing to obtain the funds necessary to purchase the MBS may add to the United States public debt, the net effect will be considerably less as the incremental debt will be offset to a large extent by the MBS assets.[37][38] A key challenge would be valuing the purchase price of the MBS, which is a complex exercise subject to a multitude of variables related to the housing market and the credit quality of the underlying mortgages.[39] The ability of the government to offset the purchase price (through mortgage collections over the long-run) depends on the valuation assigned to the MBS at the time of purchase. For example, Merrill Lynch wrote down the value of its MBS to approximately 22 cents on the dollar in Q2 2008.[40] Whether the government is ultimately able to resell the assets above the purchase price or will continue to merely collect the mortgage payments is an open item. On April 6th, 2008 the State Foreclosure Prevention Working Group reported that the pace of foreclosures exceeded the capacity of homeowner rescue programs, such as the Hope Now Alliance, in the first quarter of 2008,[41] in part because a myriad of investors and complex MBS contracts must be consulted as part of the refinancing process.[citation needed] [edit] Sweeping powersThe original plan would have granted the Secretary of the Treasury unlimited power to spend,[29] proofing his or her actions against congressional or judicial review. Section 8 of the Paulson proposal states: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."[22] This provision was not included in the final version. [edit] Potential effectsThe maximum cost of a $700 billion bailout would be $2,295 estimated cost per American (based on an estimate of 305 million Americans), or $4,635 per working American (based on an estimate of 151 million in the work force).[42] It should be noted however, that it makes little sense to merely divide the number 700 billion by the number of Americans or even by the number of American families, as the debt would not be paid in this fashion even if it were all entirely used and squandered. America pays the interest on its debt, and many Americans do not make a significant contribution to this payment or to taxes in general. The bulk of this money would be spent to purchase mortgage backed securities, ultimately backed by American homeowners, which possibly could be sold later at a profit, by the government. Economist Michael Hudson predicts that the bailout would cause hyperinflation and dollar collapse. [43] [44] [45][clarification needed] However, there is no persuasive evidence of prices rising and the U.S. Dollar Index has actually risen to higher levels than before the plan's announcement. [46] Indeed, during the week before and after the EESA was agreed, investment bank UBS was continually flatly rejecting that bailouts such as these were inflationary, emphasizing instead that they were anti-deflationary, not inflationary. [47] [48] [49] The 2008 federal budget submitted by the president is $2,900 billion, meaning a $700 billion bailout would constitute a 24% increase to $3,600 billion, which would in fact far exceed the $3.1 trillion 2009 budget. The total government commitment and proposed commitments so far in its current and proposed bailouts is reportedly $1 trillion compared to the $14 trillion United States economy.[50] [edit] Rationale for the bailout[edit] Government officialsIn his testimony before the U.S. Senate, Treasury Secretary Henry Paulson summarized the rationale for the bailout:[51]
In his testimony before the U.S. Senate on September 23, 2008, Fed Chairman Ben Bernanke also summarized the rationale for the bailout:[52]
Regarding the $700 billion number, Forbes.com quoted a Treasury spokeswoman: "It's not based on any particular data point. We just wanted to choose a really large number."[53] [edit] JournalistsAccording to CNBC commentator Jim Cramer, large corporations and institutions are pulling their money out of bank money market funds, in favor of government-backed Treasury bills. This move is slowly taking away the capital reserves the banks have grown to depend on. Cramer called it "an invisible run on the banks," one that has no lines in the lobby but pushes banks to the breaking point nonetheless. Bank runs are taking place under the radar, he said. Chief financial officers, lawyers, the wealthy – they’re all pulling their money from savings accounts and asking for T-bills. As a bank’s deposits evaporate, so too does its ability to lend and correspondingly make money. This will continue until Congress agrees on a bailout deal. “The lack of confidence inspired by Lehman’s demise, the general poor health of many banks, this is going to turn this into an intractable moment,” Cramer said, “if someone in the government doesn’t start pushing for more deposit insurance.”[54] Jim Cramer works for CNBC which is 80% owned by General Electric which also owns GE Capital (see NBC Universal). Because General Electric will directly and indirectly benefit from the bailout, Jim Cramer, MSNBC, NBC, iVillage, and CNBC have a conflict of interest in this bill. [edit] Reaction to the initial proposalSkepticism regarding the plan occurred early on in the House. Many members of Congress, including the House of Representatives, did not support the plan initially, mainly conservative free-market Republicans and liberal anti-corporate Democrats.[55] Alabama Republican Spencer Bachus has called the proposal "a gun to our head"[56] fear-inflicting policy of the administration to stifle proper debate and affect decision.[29] However, many sources have reported that for this crisis there are many alternatives and options,[57] and other less risky and more profitable solutions to use the taxpayers' funds that aren't being debated, but ought to be debated, in the rush to the sudden deal. [edit] Immediate market reactionsOn September 19, 2008, when news of the bailout proposal emerged, the U.S. stock markets surged by approximately 3%. Foreign stock markets also surged, and foreign currencies corrected slightly, after having dropped earlier in the month. The value of the U.S. dollar dropped compared to other world currencies after the plan was announced.[58][59] The front end oil futures contract spiked more than $25 a barrel during the day Monday September 22, ending the day up over $16. This was a record for the biggest one-day gain.[60] However, there are other factors that caused the massive spike in oil prices. Traders who got "caught" at the end of the October contract session were forced to purchase oil in large batches to cover themselves, adding to the surge in prices.[61] Further out, oil futures contracts rose by about $5 per barrel. Mortgage rates increased following the news of the bailout plan. The 30-year fixed-rate mortgage averaged 5.78% in the week before the plan was announced; for the week ending September 25, the average rate was 6.09%,[62] still far below the average rate during the early 1990s recession, when it topped 9.0%.[63] [edit] Potential conflict of interestThere is concern that the current plan creates a conflict of interest for Paulson. Paulson is a former CEO of Goldman Sachs and Goldman stands to benefit from the bailout. Paulson has hired Goldman executives as advisors and Paulson’s former advisors have joined banks that will also benefit from the bailout. Furthermore, the original proposal exempted Paulson from judicial oversight. Thus there is concern that former illegal activity by a financial institution or its executives might be hidden.[64][65][66] The treasury staff member responsible for administering the bailout funds is Neel Kashkari, a former vice-president at Goldman Sachs. [edit] Views from the public, politicians, financiers, economists, and journalists
Protests opposing the bailout occurred in over 100 cities across the United States on Thursday September 25.[67] Grassroots group TrueMajority said its members organized over 251 events in more than 41 states.[68] The largest gathering has been in New York City, where more than 1,000 protesters gathered near the New York Stock Exchange along with labor union members organized by New York Central Labor Council.[69][70] Other grassroots groups have planned rallies to protest against the bailout,[71] while outraged citizens continue to express their opposition online through blogs and dedicated web sites.[72]
[edit] Alternative proposalsSuggested alternative approaches to address the issues underlying the financial crisis include: mortgage assistance proposals try to increase the value of the asset base while limiting the disruption of foreclosure; bank recapitalization through equity investment by the government; asset liquidity approaches to engage market mechanisms for valuing troubled assets; and financial market reforms promoting transparency and conservatism to restore trust by market investors. [edit] Mortgage assistance
[edit] Bank recapitalization
[edit] Asset liquidity
[edit] Financial market reform
[edit] Legislative historyOver the weekend (September 27-28), Congress continued to develop the proposal. That next Monday, the House put the resulting effort, the Emergency Economic Stabilization Act of 2008, to a vote. It did not pass. US stock markets dropped 8 percent, the largest percentage drop since Black Monday in 1987. Congressional leaders, including both presidential candidates, started working with the Bush Administration and the Treasury department on key negotiation points as they worked to finalize the plan. Key items under discussion included:[124][125]
[edit] Political negotiationsAfter the President's announcement of the bailout plan on Wednesday, Sept. 24, there were negotiations on altering the proposal, and declarations of fundamental understanding between the White House and the congressional leaders having been reached were made already on Thursday morning. This apparent eagerness of the Democratic Party politicians to reach an early accommodation with the Bush administration created (in light of persistent reports of popular opposition to the bailout program) a propaganda vacuum and opportunity, into which the House Republicans quickly moved, raising objections, refusing to support the deal and presenting themselves as defenders of the ordinary taxpayer's interests. The negotiations then continued throughout Friday, when some politicians predicted a conclusion by the end of the weekend, while others indicated willingness to take their time and work on the package until it's ready.[126] [edit] First House vote, September 29Just after midnight Sunday, September 28, leaders of the Senate and House, along with Treasury Secretary Paulson, announced a tentative deal had been reached to permit the government purchase of up to $700 billion in mortgage backed securities to provide liquidity to the security holders, and to stabilize U.S. financial firms and markets. The bill was made final later that Monday morning.[4][127] A debate and vote was scheduled for the House for Monday, September 29, to be followed by a Senate debate on Wednesday.[128] In an early morning news conference, on Monday September 29, President George W. Bush expressed confidence that the bill would pass Congress, and that it would provide relief to the U.S. economy. A number of House Republicans remained opposed to the deal and intended to vote against it.[129][130][131] That same day, the legislation for the bailout was put before the United States House of Representatives. The motion voted on was an amendment to HR3997. The amendment was not accepted by the roll call vote of 228-205, with one not voting. Democrats voted 140 to 95 in favor of the legislation, while Republicans voted 133 to 65 against it.[132][133][134] During the legislative session, at the conclusion of the vote, the presiding chair declared the measure, HR3997, to be unfinished business. The bill is subject to additional legislative action.[135] House Speaker Nancy Pelosi said at a press conference after the vote: "The legislation has failed. The crisis has not gone away. We must continue to work in a bipartisan manner."[136] Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, appearing at a joint press conference with Senator Judd Gregg, a New Hampshire Republican, said a bailout plan could still pass Congress. Dodd said: "We don't intend to leave here without the job being done. While it may take another few days, we're confident that can happen."[132] [edit] Market reaction to September 29 voteFollowing the House vote, the Dow Jones Industrial Average dropped over 777 points in a single day, its largest single-day point drop ever.[137] The $1.2 trillion loss in market value received much media attention, although it still does not rank among the index's ten largest drops in percentage terms. The S & P lost 8.8%, its seventh worst day in percentage terms and its worst day since Black Monday in 1987. The NASDAQ composite also had its worst day since Black Monday, losing 9.1% in its third worst day ever. The TED spread, the difference between what banks charge each other for a three-month loan and what the Treasury charges, hit a 26-year high of 3.58%; a higher rate for inter bank loans than Treasury loans is a sign that banks fear that their fellow banks won't be able to pay off their debts. Meanwhile, the price of U.S. light crude oil for November delivery fell $10.52 to $96.37 a barrel, its second largest one-day drop ever, on expectations of an economic slowdown reducing oil consumption and demand.[138] The Dow Jones industrial average recovered 485 points or about 62% of the entire loss the very next day.[139] Markets which had expected the bill to pass and had moved on to debating whether it would be sufficient were already skittish after news that Wachovia Bank was being bought out by Citigroup to avoid collapse. The events were compounded by news from Europe that Dutch-Belgian Fortis Bank was given a $16.4 billion lifeline to avoid collapse, failing British bank Bradford & Bingley was nationalized, and Germany extended banking and real estate giant Hypo Real Estate billions to ensure its survival.[138] Later in October, after the bill had been passed, the Dow Jones Industrial Average would drop by more in percentage terms, and market volatility remained at historically high levels, as measured by the VIX. [edit] Senate vote October 1
On Wednesday evening, October 1, 2008, the Senate debated and voted on a revised version of the Emergency Economic Stabilization Act of 2008 (EESA 2008). The legislation was framed as an amendment to HR1424, substituting the entire bill with the newly revised text of the EESA 2008.[7][9][140] The amendment was approved by a 74-25 vote, and the entire bill was also passed by the same margin, 74-25.[141][142] Only cancer-stricken Senator Ted Kennedy did not vote. Under the legislative rule for the bill, sixty votes were required to approve the amendment and the bill.[9][139][140] A House leader accused the Senate of legislating "by blunt force" without public-consent.[143] Senate has also been accused of "sweetening" the bailout to force its passage by the opposing House.[17][144] [edit] Second House vote, October 3
The revised HR1424 was received from the Senate by the House, and on October 3, it voted 263-171 to enact the bill into law.[6][12] President Bush signed the bill into law within hours of its enactment, creating a $700 billion dollar Treasury fund to purchase failing bank assets.[13] The revised plan left the $700 billion bailout intact and appended a stalled tax bill.[139] The law has three major divisions, Division A: the Emergency Economic Stabilization Act of 2008; Division B: Energy Improvement and Extension Act of 2008, and Division C: the Tax Extenders and Alternative Minimum Tax Relief Act of 2008.[6] The tax part of the law has provisions that will have a net expenditure of $100 billion over 10 years. It had been stalled due to a disagreement between Democrats that did not want to increase spending without a corresponding increase in taxes and Republicans, who were adamantly opposed to any tax increases. [edit] Key items in the legislationOn October 3, 2008, the Emergency Economic Stabilization Act became law with the signing of Public Law 110-343, which included the act.[145] Below is a list of key items and how the legislation deals with them. [edit] Interest on bank deposits held by the Federal Reserve
Section 128 of the bill allowed the Federal Reserve System (the Fed) to begin paying banks a high interest rate on their deposits held for reserve requirements. It reads:
The Fed announced that it would begin paying such increased interest on reserve balances on October 6, 2008.[146] Banks immediately increased the amount of their money on deposit with the Fed, up from about $10 billion total in September to $800 billion by the end of December.[147][148] In comparison, the increase in reserve balances reached only $65 billion after September 11, 2001 before falling back to normal levels within a month. The U.S. Treasury Department explained the changes, saying:
Reactions to the change were mixed, with banks generally approving of their new ability to earn high interest without risk on funds that they would otherwise need to use to extend credit in order to make a profit for their shareholders, while those involved in the commercial paper markets, the primary and secondary sectors of the goods and services economy, shipping, and others depending on the liquidity of credit from banks were more skeptical of the further pressure against credit availability in the midst of the ongoing credit liquidity crisis.[150][151] The day after the change was announced, on October 7, Fed Chairman Ben Bernanke expressed some confusion about it, saying, "We're not quite sure what we have to pay in order to get the market rate, which includes some credit risk, up to the target. We're going to experiment with this and try to find what the right spread is."[152] The Fed adjusted the rate on October 22, after the initial rate they set October 6 failed to keep the benchmark U.S. overnight interest rate close to their policy target,[152][153] and again on November 5 for the same reason.[154] Beginning December 18, the Fed directly established interest rates paid on required reserve balances and excess balances instead of specifying them with a formula based on the target federal funds rate.[155][156] The government issued $400 billion of short-term debt intended to help replace the $1.8 trillion commercial paper market which was wiped out by the change,[157] but the world economy began to deflate as international shipping, dependent on commercial paper, slowed in some regions to a few percent of levels prior to the change.[158][159] The FDIC announced a new program on October 14, under which newly issued senior unsecured debt issued on or before June 30, 2009, would be fully protected in the event the issuing institution subsequently fails, or its holding company files for bankruptcy.[160] The FDIC program is expected to cover about $1.4 trillion of bank debt.[161] [edit] Management of the Troubled Asset Relief ProgramThe bill authorizes the Secretary of the Treasury to establish the Troubled Asset Relief Program to purchase troubled assets from financial institutions. The Office of Financial Stability is created within the Treasury Department as the agency through which the Secretary will run the program. The Secretary is required to consult with the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Comptroller of the Currency, the Director of the Office of Thrift Supervision, and the Secretary of Housing and Urban Development when running the program.[162][163] [edit] FundingThe bill authorizes $700 billion for the program. The Treasury Secretary has immediate access to the first $250 billion. Following that, an additional $100 billion can be authorized by the President. For the last $350 billion, the President must notify Congress of the intention to grant the additional funding to the Treasury; Congress then has 15 days to pass a resolution disallowing the authority. If Congress fails to pass a resolution opposing the funding within 15 days, or if the resolution passes, but is vetoed by the President, and Congress does not have enough votes to override the veto, the Treasury will receive the final $350 billion.[164][165] [edit] Government equity interests in participating firmsThe Treasury Secretary is required to obtain a financial warrant guaranteeing the right to purchase non-voting stock or, if the company is unable to issue a warrant, senior debt from any firm participating in the program. The Secretary is allowed to make a de minimis exception to the rule, but that exception may not exceed $100 million.[166][167] [edit] Executive pay limitsIf the Treasury purchases assets directly from a company, and also receives a meaningful equity or debt position in that company, the company is not allowed to offer incentives that encourage "unnecessary and excessive risks" to its senior executives (that is, the top five executives).[168] Also, the company is prohibited from making golden parachute payments to a senior executive. Both of these prohibitions expire when the Treasury no longer holds an equity or debt position in that company. The company also is given "clawback" permission; that is, the opportunity to recover senior executive bonus or incentive pay based on earnings, gains, or other data that proves to be inaccurate.[169][170] If the Treasury purchases assets via auction, and that purchase exceeds $300 million, any new employment contract for a senior officer may not include a golden parachute provision in the case of involuntary termination, bankruptcy filing, insolvency, or receivership. This prohibition only applies to future contracts; golden parachutes already in place will remain unaffected.[169][170] In either scenario, no limits are placed on executive salary, and existing golden parachutes will not be altered.[171] [edit] TransparencyFor each purchase made under the program, the Treasury Secretary is required to disclose a description of the transaction, the quantity of assets involved, and the pricing of those assets within two days of the transaction, and in electronic form.[166][172] [edit] Foreclosure avoidance and homeowner assistanceFor mortgages involved in assets purchased by the Treasury Department, the Treasury Secretary is required to (1) implement a plan that seeks to maximize assistance for homeowners, and (2) encourage the servicers of the underlying mortgages to take advantage of the HOPE for Homeowners Program of the National Housing Act or other available programs to minimize foreclosures.[166] Furthermore, the Secretary is allowed to use loan guarantees and credit enhancements to encourage loan modifications to avert foreclosure.[173] The bill does not provide a mechanism to change the terms of a mortgage without the consent of any company holding a stake in that mortgage.[174] The Treasury did not use this provision. "The primary purpose of the bill was to protect our financial system from collapse," Secretary Henry Paulson told the House Financial Services Committee, "The rescue package was not intended to be an economic stimulus or an economic recovery package."[175] [edit] Judicial reviewThe bill establishes that actions taken by the Treasury Secretary regarding this program are subject to judicial review,[166][176] reversing the request for immunity made in the original Paulson proposal.[177] [edit] OversightSeveral oversight mechanisms are established by the bill.
The Financial Stability Oversight Board is created to review and make recommendations regarding the Treasury's actions.[178][179] The members of the board are:
A Congressional Oversight Panel is created by the bill to review the state of the markets, current regulatory system, and the Treasury Department's management of the Troubled Asset Relief Program. The panel is required to report their findings to Congress every 30 days, counting from the first asset purchase made under the program. The panel must also submit a special report to Congress about regulatory reform on or before January 20, 2009.[178][180] The panel consists of five outside experts appointed as follows:
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