Bill:HR 1424 — PL 110-343

Status: In an extraordinary response to what was threatening to become the worst financial and economic crisis in more than half a century, Congress granted the Treasury authority to spend as much as $700 billion to acquire seemingly worthless mortgage-based assets from financial companies and to buy stock in troubled institutions in an attempt to limit the fallout from rising foreclosures and falling home prices. The measure was not universally accepted — and the House at first rejected it — but still it was enacted within eight days of a behind-closed-doors request on Capitol Hill that had left lawmakers looking ashen at the prospect of a global financial collapse.

Synopsis: The legislation was the third broad effort by Congress in 2008 to address the worsening economy — following an earlier tax-driven stimulus bill and a measure to stem rising foreclosures. This effort grew out of a late-night meeting with congressional leaders on Sept. 18, led by Treasury Secretary Henry M. Paulson Jr. and Federal Reserve Chairman Ben S. Bernanke , who pleaded for an emergency response to the deepening crisis. During the two weeks that preceded their request, the Treasury had taken control of mortgage giants Fannie Mae and Freddie Mac; the fourth-largest investment house, Lehman Brothers Holdings Inc., had been allowed to go bankrupt; the Fed and Treasury had bailed out the country’s largest insurance company, American International Group Inc.; and global financial conditions had deteriorated further, threatening banks, pension funds and individual investors.

Credit markets were frozen, largely because lenders held hundreds of billions of dollars in mortgage-related securities whose value was deemed negligible because of the rising number of foreclosures and the volume of subprime home loans that were in danger of default. As a result, banks tightened their lending standards — refusing even to do business with one another — and Paulson and Bernanke warned that the resulting denial of credit would cripple the broad economy.

As outlined in their Capitol Hill meeting with the leadership, Paulson and Bernanke asked for approval of a comprehensive — if not clearly defined — plan to have the government take on its books the bulk of the essentially worthless assets of damaged banks and investment firms. “The ultimate taxpayer protection will be the stability this troubled asset relief program provides to our financial system, even as it will involve a significant investment of taxpayer dollars,” Paulson said at a news conference the following morning to explain his plan to commit hundreds of billions of dollars to this salvage operation.

In negotiations with lawmakers from the House and Senate, Paulson agreed to terms including authority for the Treasury to receive an initial $250 billion, an additional $100 billion following a certification from the president that the money was needed, and a further $350 billion if the president requested it and Congress agreed, using an expedited procedure. While the delicate compromise essentially left the Treasury’s broad asset-buying powers intact, it provided assurances to nervous lawmakers that taxpayer investments would be paid back. Safeguards included an oversight panel and authority for the Treasury to take equity positions in companies receiving assistance. The negotiated agreement also included some restrictions on executive pay for companies that got money from the bailout fund.

The plan was to use a military tax relief bill (HR 3997) that had previously passed both chambers in differing forms as the vehicle for the negotiated bailout deal. But resounding opposition from conservative Republicans, who said the huge intervention violated free-market principles, and liberal Democrats, who argued that Wall Street executives didn’t deserve a bailout, led to an unexpected defeat on the House floor.

Stock prices slumped even as the House was voting down the bill, and it fell to the Senate to try to revive the bailout. Two days after the House rejected it, the Senate attached the bailout agreement to a mental health parity measure (HR 1424) that the House had passed in March. The legislation was further sweetened with the addition of a package of extensions for popular but expiring tax breaks, plus an increase in the limit on federal insurance for bank deposits. (Mental health parity, p. 3280; tax break extensions, p. 3285)

Few lawmakers were enamored with the bailout, but acting on the expectation that they had little choice, the Senate passed the bill, and the House went along two days later. Fewer than two hours after the House cleared the bill, President Bush signed it into law.

Since enactment, the bailout program has continued to evolve. Originally pitched as a plan to buy up troubled assets, it has mostly been used by the Treasury Department to make direct capital injections for banks through stock purchases. Although lawmakers and officials said little during debate on the legislation about the authority given Treasury to make equity purchases, it granted the governmentwide discretion to buy financial instruments, including stock.

Legislative Action:

House rejected bailout, offered as an amendment to HR 3997, 205-228, on Sept. 29.

Senate passed bailout, offered along with tax extenders as an amendment to HR 1424, 74-25 on Oct. 1.