Senate Plans to Vote This Evening on Financial System Rescue Plan

September 30, 2008 07:00 PM
 

via a special arrangement with Informa Economics, Inc.

Key changes made to package to attract more House votes


NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.

The Senate plans to vote this evening on a $700 billion financial rescue measure that will include an increase in bank-deposit limits and tax-extender language that includes the biodiesel credit program, among other possible new items. The modifications are part of an effort to attract more votes, especially from Republicans.

Senate Banking Chairman Christopher Dodd (D-Conn.) had initially rejected the idea of the Senate voting first on a revised rescue plan. But the idea gained momentum throughout Tuesday.

Congressional leaders expect a likely Senate approval vote would build momentum for passage of the bill in the House, which on Monday rejected the $700 billion rescue package. The House is set to reconvene at noon Thursday Eastern Time.

The Senate measure will be subject to a filibuster-proof, 60-vote threshold. The Senate will also vote on an amendment by Sen. Bernie Sanders (I-Vt.) that would institute a five-year, 10 percent surtax on individuals with incomes exceeding $500,000 and couples that make more than $1 million. The proposal is expected to fail.

Sources say the revised rescue measure is expected to pass overwhelmingly in the Senate with 70 votes or more.

How the Senate can vote on the revised package before the House: Under the Constitution, tax bills must originate in the House. While the rescue measure contains tax provisions, the Senate could initially consider a House-passed tax bill and use that as a vehicle for action on a financial rescue proposal.

The changed package would temporarily raise (likely for one year) the limit on federal deposit insurance to $250,000 from $100,000 – the limit has not been increased in 28 years.

Federal Deposit Insurance Corporation (FDIC) Chairman Sheila Bair sought the temporary increase in the bank- deposit insurance limits. That move was endorsed by both Republican presidential nominee John McCain and Democratic rival Barack Obama. Both presidential candidates plan to return to Washington for tonight's vote.

Obama said that while the current $100,000 guarantee is adequate for most families, “it is insufficient for many small businesses that maintain bank accounts to meet their payroll, buy their supplies, and invest in expanding and creating jobs.”

Facts and figures. The Los Angeles Times reported on the finances of the FDIC. Its deposit insurance fund had $45.2 billion as of June 30, raised from premiums paid by banks. The FDIC insured roughly $4.5 trillion in deposits as of the second quarter. “The FDIC plans to increase those premiums, although it is unclear that the rise will be substantial, given the current crisis. In addition, it can borrow up to $30 billion from the Treasury,” the paper said.

Importantly, the American Bankers Association on Tuesday came out in support of the FDIC insurance limit increase.

An alternative would be to temporarily waive the premiums that banks pay to the FDIC and have the Treasury be liable for covering losses.

The tax extender package includes $17 billion in tax credits for the development of solar, wind and other forms of renewable energy, including biodiesel. It passed the Senate on a 93-2 vote last week and differs from a version the House also approved.

Importantly, the tax package would save 24 million households from a $62 billion alternative minimum tax (AMT) that is due to take effect this year.

Conflicting dynamics in House. House Minority Leader John Boehner (R-Ohio) said the tax extender language will appeal to House Republicans. But adding the tax extender language could complicate the issue in the House because fiscally conservative House Democrats opposed the Senate bill because it was not fully offset by next tax revenue. The House version of the tax extension legislation was paid for. But Senate leaders have said Republicans have refused to vote for a bill that is fully offset.

House Speaker Nancy Pelosi (D-Calif.) had a tempered reaction to the developments in remarks on Tuesday. “The Senate has made a decision about how to proceed and what can pass that body. The Senate will vote [this evening] and the Congress will work its will,” Pelosi said in a statement.

President George Bush on Tuesday again urged Congress to deal with its reservations and pass the rescue legislation. “I recognize this is a difficult vote for members of Congress,” Bush said. “Many of them don’t like the fact that our economy has reached this point, and I understand that. But the reality is that we’re in an urgent situation, and the consequences will grow worse each day if we do not act.” He warned, “If our nation continues on this course the economic damage will be painful and lasting.”

White House spokesman Tony Fratto said that the administration was open to modifications of the failed plan as long as it continued to hew to the core principles laid out by Treasury Secretary Henry Paulson.

Over in the House, Tuesday’s discussions included both an expansion of FDIC insurance and a possible expansion of the unemployment insurance program. Another proposal would create an emergency financial crimes office in the Justice Department.

Republican Study Committee (RSC) members also proposed new Securities and Exchange Commission (SEC) regulations prohibiting “mark to market” accounting, which requires companies to value assets based on their current potential sale prices.

The SEC on Tuesday gave companies more leeway to figure out the value of assets for which there are no buyers. Over the past year, some financial firms have had to write down the value of assets; under the accounting rule, if there is no active market, an asset's value would have to be cut substantially, even if it might be worth something in the future. That has eroded firms' capital base, making them more vulnerable to downturns in the market and reducing confidence among investors.

Still other potential changes to the rescue package: jobless benefits and homeowner tax breaks such as a new $1,000 tax deduction for homeowners who do not itemize deductions.

Mental health parity language will reportedly be included in the new Senate bill. The proposal would require that private health insurers make mental health and addiction-treatment benefits equal to traditional medical benefits, so that co-payments, treatment limits and out-of-network coverage could not be less generous for mental health and addiction treatments. The language is the same as that from the original Senate tax extenders bill.

The parity language will likely garner more votes for the tax package.


Comments: While it is far easier to predict the Senate will approve whatever final language gets to the floor for debate and a vote, the coming House vote is harder to call. But veteran congressional contacts say the bill would not be brought up again on the House floor if it did not have enough votes to pass.

The tax extender language in the Senate approach is key. The unknown is how many Blue Dog Democrats will say no to not offsetting the tax extenders, and how many Republican House members the tax extension language can garner.

It remains to be seen if other sweeteners are enough to woo a majority of House members to vote for the rescue package this time.

If the rescue plan is passed by both chambers and signed into law, the odds decrease that there will be a lame-duck session after the elections. Proponents of passing Free Trade Agreements with Colombia, Panama and perhaps South Korea were hoping that a lame-duck session could deal with those contentious issues.


NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.


 

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