Rescue Plan’s Legislative Saga Ends, But Not Without Questions

In the end, however, most lawmakers appeared convinced by warnings from congressional leaders, the White House and business interests that they had to do something fast to shore up the financial sector, particularly the credit market that greases the day-to-day economy. Key voting blocs — including conservative Blue Dog Democrats, moderate Republicans and the Congressional Black Caucus — thew enough support behind the bill to push it over the top.

John Lewis , D-Ga., who voted against the earlier version of the legislation, said he had concluded that “the cost of doing nothing is greater than the cost of doing something.”

“The people are afraid. Their retirement savings are slipping away. Small businesses have no sales, no credit and are closing their doors,” Lewis said.

Indeed, the bad news continued to come in as lawmakers headed to the floor Friday morning to explain and defend their decisions. The Labor Department reported that employers slashed 159,000 jobs in September — the ninth straight month of job losses. And California lawmakers were alarmed by a warning from Gov. Arnold Schwarzenegger that the state may be unable to obtain financing for routine government business and have to ask the Treasury for short-term financing.

Majority Leader Steny H. Hoyer , D-Md., said, “What happens on Wall Street is bound up with the jobs of millions, and the retirements of millions, and the homes of millions, and the dreams of millions.”

“For their sake,” he said, “we must act, together, today.”

A Rescue and Then Some

The vote capped a relatively speedy 12 days of legislative work, beginning with the Treasury Department’s first unveiling of a three-page proposal Sept. 21 and culminating with the 451-page bill cleared on Friday. More broadly, Friday’s action marks a major escalation in the government’s campaign to rehabilitate the nation’s ailing credit markets.

Treasury Secretary Henry M. Paulson Jr. ’s core plan remained largely unchanged. It would give the Treasury Department broad authority to buy $700 billion worth of troubled assets, mostly mortgage-backed securities, in a bid to clear up the books of financial institutions and encourage them to start lending again. Lawmakers qualified that plan with a parceling out of the spending authority, executive compensation limits and oversight requirements.

After the House failed to pass that version of the legislation, the Senate assembled a plan that added a package (HR 6049) to extend expiring tax provisions, expand incentives for renewable energy and prevent the alternative minimum tax from hitting millions more Americans. That package also would require health insurers who offer mental health coverage to provide the benefits equal in cost and scope to traditional medical benefits.

Another key change the Senate made was was an expansion of Federal Deposit Insurance Corp. coverage to $250,000 per bank account, from $100,000 currently.

Adding Up the Numbers

On Monday, Democrats supported the original bailout plan by 140-95, while Republicans voted against it by 65-133. On Friday, Democrats voted 172-63 in favor of the revised plan; Republicans still opposed it, but much more narrowly, 91-108.

Rescue Plan’s Legislative Saga Ends, But Not Without Questions

“This bill has every known oversight mechanism ever conceived in it now,” House Minority Leader Roy Blunt , R-Mo., assured the House on Friday. “This is well beyond the proposal that came to the Congress. It has the guarantees the taxpayers should ask for. And it has lots of options that weren’t in the original plan.”

In addition to the surge in Republican support, a number of Democrats, prominent among them members of the Congressional Black Caucus who had been lobbied hard by presidential candidate Sen. Barack Obama , D-Ill., decided to switch from no to yes.

Jesse Jackson Jr., D-Ill., who switched from “no” to “yes” after talking to longtime friend Obama, said the Democratic nominee assured him that he would use the powers granted in the legislation to try to fend off foreclosures and that he will fight predatory lending if he is elected.

Also shifting their votes were at least four freshman Democrats, part of the “majority makers” whose 2006 election gave the party control of the House for the first time in a dozen years.

“It balances the needs of middle-class families in ways that the original bill did not,” said Maizie K. Hirono, D-Hawaii. She was joined by Betty Sutton , D-Ohio; Bruce Braley , D-Iowa, and John Yarmuth , D-Ky.

But some lawmakers were more swayed by the voices of angry constituents, who consider the legislation a taxpayer bailout for wealthy and reckless financial speculators.

“My calls are still running ‘no,’ so I am going to follow the views of my constituents,” said William Lacy Clay , D-Md. “They don’t think it’s right. They have paid their bills on time. They haven’t gotten into risky mortgages. . . . They think Wall Street took the risk . . . and I agree with them.”

Historic Vote

In voting for the measure, lawmakers put their stamp of approval on the largest government intervention in the financial market since the Great Depression. Faced with mounting losses in the financial sector — brought on by toxic assets linked to souring mortgage loans — the Treasury, along with the Federal Reserve, have deployed a wide array of tools to try and restore liquidity. Mounting foreclosures, particularly on exotic subprime loans, drove down the value of securities tied to home loans.

Those plunging asset prices blew multi-billion dollar holes in bank balance sheets, raising fears that major financial institutions could fail. As a result, banks became increasingly wary of lending to each other, causing a tightening of credit conditions throughout the market.

But nervous regulators fretted that their liquidity-boosting measures wouldn’t be sufficient. In March, the Fed put $30 billion on the line to prop up failing investment bank Bear Stearns Cos., fearing that its implosion could bring down the rest of Wall Street.

A bailout of mortgage giants Fannie Mae and Freddie Mac, along with insurance giant AIG, followed at the end of this summer. But at each turn, credit for financing basic business operations, like restocking inventory and payroll, continued to dry up.

Concerned that a long-term freeze in the credit markets could damage the underlying economy, Paulson and Fed Chairman Ben S. Bernanke decided they needed Congress to approve vast new powers to excise those toxic assets from the financial system.

Rescue Plan’s Legislative Saga Ends, But Not Without Questions

Paulson’s initial plan called for nearly unfettered power for the government to buy up to $700 billion worth of souring assets. The government would hold those securities for some time, possibly years, selling them back to private buyers when the markets had calmed.

Congress blasted the initial proposal, saying it did too little to protect taxpayer investment while providing no significant oversight of the new program. Constituents flooded Hill offices with calls pillorying the plan.

Lawmakers from both parties spent the following week creating a delicate compromise that would put significant restrictions on the Treasury program. The resulting bill would parcel out the money in installments, limit executive compensation at participating firms and establish a government insurance plan for asset-backed securities, paid for by financial institutions, which House Republicans pushed for.

The government would be required to take an equity stake in a company that participates in the program. Those “warrants” for taking stock or debt in a participating company would have to have terms that would protect taxpayers from losses associated with the eventual sale of any assets purchased.

Even with those changes, House lawmakers rebuffed the bill Sept. 29, causing a dramatic fall in the stock market.

Across the Capitol, stunned Senate leaders decided to take the initiative and press forward with the bailout package, adding enticements like the tax package and mental health parity to attract more votes in the House. From the beginning, the bailout process had gone more smoothly in the Senate, where Republican leaders quickly got behind Democrats’ plan to revise the original Paulson plan.

In part, the different tone was institutional — with their six-year terms, senators were more willing to take a stand that was initially unpopular in an election year. Senate Banking Committee Chairman Christopher J. Dodd , D-Conn., took the lead in the Senate as Sen. Judd Gregg , R-N.H., emerged as the lead Republican negotiator and perhaps the deal’s most forceful proponent.

The Senate passed the package — after attaching the tax extenders package in a bold power-play — on Wednesday, by an overwhelming 75-24 vote.

Edward Epstein, Jonathan Allen, Adrianne Kroepsch, Liriel Higa, Colby Itkowitz, Michael Teitelbaum and Molly K. Hooper contributed to this story.