Explainer: Why did the bailout plan fail?
(CNN) — After days of delicate negotiations between U.S. government officials, Treasury chiefs and Congressional leaders, agreement seemed to have been reached Sunday on details of a $700 billion plan authorizing Treasury Secretary Henry Paulson to buy toxic debts from banking institutions to allow them to resume borrowing normally. But the bill failed at the first legislative hurdle Monday as lawmakers in the House of Representatives rejected it by 228 votes to 205.
Why did lawmakers reject the bill?
Many lawmakers, especially on the Republican side of the House, had voiced concerns about the $700 billion cost to U.S. taxpayers, arguing that ordinary citizens were being asked to foot the bill to clean up a mess created on Wall Street. Fortune magazine’s Washington bureau chief Nina Easton said that many lawmakers, facing re-election in November, feared a backlash among voters if they backed they plan.
This legislation is giving us a choice between bankrupting our children and bankrupting a few of these big financial institutions on Wall Street that made bad decisions, said Republican Congressman John Culberson. Other Republican free market advocates argued that the bill would have been a blow against economic freedom.
On the Democratic side, there were concerns that the bill did not provide enough protection for taxpayers. Others said the legislation had been rushed through without due consideration. Like the Iraq war and Patriot Act, this bill is fueled by fear and haste, said Democrat Lloyd Doggett. Watch Republicans lay the blame at Democratic feet
What are the consequences?
Ahead of the vote, backers of the bailout plan had argued that urgent action was necessary to underpin the foundations of the entire U.S. economy. Billionaire Warren Buffett said that failure to agree a plan would leave the U.S. facing the biggest financial meltdown in American history. In a televised address, U.S. President George W. Bush said that without immediate action by Congress, American could slip into a financial panic and a distressing scenario could unfold.
But the immediate consequences were felt most sharply in the financial markets, already badly bruised by weeks of heavy losses. Approximately $1.2 trillion had been wiped off the market value of U.S. stocks by the close of Monday trading with the Dow Jones index suffering its worst ever points loss, losing 778 points — a seven percent slide. Asian markets were also down and European markets mixed Tuesday.
What happens next?
Treasury Secretary Henry Paulson says he will continue to work with congressional leaders to draft a plan acceptable to lawmakers and members of the House will likely be asked to vote again before the end of the week — possibly on an amended plan including more protection for taxpayers’ money. Those who voted against the plan can expect to be courted intensely in coming days.
White House spokesman Tony Fratto said: We think the mechanisms in this plan were the best to deal with the crisis that we are facing. The core of this plan we think will solve the problem; it was big enough and substantial enough in terms of what we were trying to do… So this plan really needs to get done to give the Treasury Secretary the tools he needs to prevent our economy from slipping… The facts are that America’s credit system is broken and it will be broken until we take the steps to fix it.
How does this affect the banks?
The financial landscape has already been radically transformed by the collapse in U.S. house prices and the subsequent credit crunch with investment bank Lehmans Brothers going bankrupt, Merrill Lynch being bought out by Bank of America and the U.S. government intervening to prop up mortgage lenders Fannie May and Freddie Mac and insurance giant AIG.
The failure of the bailout plan will only undermine confidence in the banking system further, pushing more banks into trouble as customers withdraw their money. They have to pass some sort of bill otherwise soon it’s going to get down to the point where people actually take money out of the bank and put it in their mattress, trader Wayne Carson told CNN. Watch a Wall St. veteran tell why he thinks the bailout is vital
How does this affect the rest of us?
The credit crunch has already affected the entire economy with Main Street already feeling the squeeze from rising fuel prices, rising food prices and rising unemployment. Many economists fear the U.S. is heading for recession. With banks unable or unwilling to lend to each other until the credit crisis eases up, many companies may be unable to borrow the money they need to pay their weekly bills, including salaries. The likely consequence is further job losses.
This is not about suits on Wall Street making their salaries, this is about financial institutions who loan money to your bank so that you can get a loan or you can buy a car or you can get a mortgage or you can get a credit card… this is our financial system that is freezing up, said CNN senior business correspondent Ali Veshi.
Should I panic?
