The economy in turmoil: Fresh regulation of financial industry foreseen after a divided House - fearing an even worse catastrophe if the legislation failed - approves much-maligned rescue plan on second try
Carolyn Lochhead, Chronicle Washington Bureau
Oct. 4, 2008
In four long days, as credit markets froze, Democratic presidential nominee Barack Obama worked the phones with President Bush. California Gov. Arnold Schwarzenegger leaned on the California congressional delegation. The chairmen of General Motors and Chrysler allied with the small-town car dealer and banker in a full-court press on Congress. And in the end, they helped House Speaker Nancy Pelosi, a Democrat from San Francisco, engineer the biggest bailout of the banking system in U.S. history.
The overwhelming 263-171 House vote for the $700 billion rescue erased a stunning defeat Monday that shocked Pelosi and her GOP counterpart, Minority Leader John Boehner of Ohio. That defeat, and fear that inaction would lead to a once-in-a-century style economic collapse, set in motion the most extraordinary political alliance witnessed in modern times.
The nation's top leaders quickly rallied their combined forces behind an unprecedented and deeply unpopular government intervention in the U.S. economy, one that offended much of the public and the ideological wings of both parties just one month before a presidential election.
Three Bay Area Democrats switched their votes to yes: St. Helena's Mike Thompson, Petaluma's Lynn Woolsey and Oakland's Barbara Lee.
Riding the powerful political tailwind of a 74-25 bipartisan Senate vote Wednesday night, 24 Republicans and 32 Democrats changed to yes votes. They had spent two days at home hearing horror stories from small and large businesses shut off from bank credit lines and unable to float short-term loans to buy inventories or meet payroll. They heard from retirees who had seen their savings evaporate in the $1.2 trillion stock market plunge that followed the House rejection. And on Friday, they heard the news that 159,000 more Americans had lost their jobs in September.
House Speaker Nancy Pelosi (D-CA) holds up the HR1424 Financial Rescue package bill she just signed while House Financial Services Committee Chairman Barney Frank (D-MA) (L), James E. Clyburn (D-SC) (2nd-L), House Mahority Leader Steny Hoyer (D-MD) and Rep. Rahm Emanuel (R-IL) (R) stand nearby on Capitol Hill October, 3, 2008 in Washington, DC. Moments earlier the House of Representatives passed the revised version of the financial rescue package that failed to pass on Monday. (Photo by Mark Wilson/Getty Images)
Calls from Obama
Thompson and Lee got a call from Obama. Lee, the only member of Congress to vote against the use of force after the Sept. 11, 2001, terrorist attacks - and perhaps the one least likely to hand $700 billion to Bush's Treasury secretary - said she was convinced that she could "not afford to risk the potential consequences of inaction. ... I am confident that this is the right vote, even if it's not a popular vote."
Republican nominee John McCain, who announced with fanfare after the crisis broke that he was suspending his campaign to return to Washington to broker a resolution, made calls as well. But GOP members and aides said he did not show the urgency of either Bush or Obama in pushing for the bill.
Rep. Joe Knollenberg, R-Mich., who switched his vote to yes, said he had not heard from McCain but that he had "never talked to so many bank presidents." He heard from General Motors Chairman Rick Wagoner, Chrysler Chairman Robert Nardelli and Treasury Secretary Henry Paulson.
The U.S. Chamber of Commerce revved up an intense lobbying effort, along with state and local governments who warned that it had become impossible to float bonds or get bridge loans to cover normal spending while awaiting receipt of property and sales tax revenue. Some members were lured by the $150 billion in popular tax breaks added by the Senate. These extended shelter for 26 million upper-middle-income taxpayers from the dreaded alternative minimum tax, as well as popular business tax credits for renewable energy and research and development.
It was Paulson, joined by Federal Reserve Chairman Ben Bernanke, who stunned first Bush and then congressional leaders on Sept. 18 with dire alarms that the nation's financial system was on the brink of collapse and would require a huge government intervention. The warning from Bernanke, who in academic life was a leading authority on the Great Depression, was especially persuasive to Pelosi.
Within an hour of the House vote Friday, Pelosi "enrolled" the bill in a quick signing before a roar of cameras, sending it immediately to the White House.
Pelosi's ally and top negotiator, House Financial Services Chairman Barney Frank of Massachusetts, declared that history had delivered a great irony.
Predicting a historic shift on the order of President Franklin D. Roosevelt's New Deal, which followed the nation's last great financial cataclysm in the 1930s, Frank heralded the start of a new era of regulation and the end of a GOP-led laissez-faire regime that began under Democratic President Jimmy Carter but became the ideological coda of Republican President Ronald Reagan and reached its climax under Bush.
Frank promised, "a set of regulations for all of the financial industry. ... We have an ability to generate risk that has outstripped our capacity to constrain it appropriately, and that is an essential role for government."
Roots of crisis
The roots of the crisis date before Bush, but it was under his administration, with the help of Democrats in Congress, that a housing price bubble developed and mortgages were extended to those who could not afford them. Regulators failed to see that the securities backed by those mortgages, rather than diversifying risk, as they believed, spread risk through the global economy, much of it unconstrained, and even unmonitored by any regulator.
When housing prices fell, those securitized assets crashed too. Ad hoc interventions by Paulson and Bernanke failed to stop a contagion of debt write-downs. A fear that the world's financial institutions were no longer creditworthy quickly took hold.
Under the legislation, the government will buy many of those toxic assets, removing them from bank balance sheets in the hope of restoring confidence and allowing banks to lend again.
No one promises that the bailout will stop the recession that is now clearly under way. The hope is that it can prevent a widespread collapse of economic activity and millions of job losses. Its aim is as much psychological as substantive - to restore confidence. But it will not by itself stop the decline in housing prices at the root of the crisis. Frank called the bill "the prevention of job destruction act" and explained the reluctance of members to expend such a huge sum merely to avoid the chance that something worse will happen.
Recalling a crude analogy by former President Lyndon Johnson, Frank compared such votes to a man who relieves himself down the leg of a dark suit: "You get a warm feeling, but nobody knows you did it."
The wonder of it was that political leaders on both sides expended such herculean effort. All were convinced that action was essential to prevent a national catastrophe. The bailout will bring no benefit to Republicans, many of whom see the beginning of American socialism, or to Democrats who see a handout to Wall Street billionaires.
"This administration will march off into the sunset with $700 billion of other people's money," said Rep. Darrel Issa, R-Vista (San Diego County), who voted no.
Rep. Sue Myrick, R-N.C., nearly shouted at reporters about why she was switching her no vote to yes. "I may lose my race over this," she said. "I really don't care about politics. I don't care whether it helps the party. I'm sick of that. It needs to be what's right for the country. We need to be Americans."
Pelosi toned down her anti-administration rhetoric before the vote, and struck a conservative note, warning that "all this money" should not be spent without "thinking of the debt we're heaping on our children."
"We've been dealt a mighty bad hand," Pelosi said.
Afterward, she made clear that the crisis will become a new basis of her long-standing calls for a "new direction."
'Free market believers'
"We are all believers in the free market," she said. "We know that the free markets create jobs, create capital, create wealth, that's very important. But recently, left unregulated and undisciplined and unsupervised, they created chaos. That was then. This is now. We're about the future and that is where - the direction we want to take our policy. We want to take our - take our country in a new direction for the middle class."
Bush expressed relief on news of the House passage.
"There were moments this week when some thought the federal government could not rise to the challenge," he said, thanking Democratic and Republican leaders. "I know some Americans have concerns about this legislation, especially about the government's role and the bill's cost. As a strong supporter of free enterprise, I believe government intervention should occur only when necessary. In this situation, action is clearly necessary."
Carolyn Lochhead was the Washington correspondent for the San Francisco Chronicle, where she covered national politics and policy for 27 years. She grew up in Paso Robles (San Luis Obispo County) and graduated from UC Berkeley cum laude in rhetoric and economics. She has a masters of journalism degree from Columbia University. Twitter: @carolynlochhead