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Senate-Approved Bailout Plan Heads for House Vote

2 October 2008 - Markets - Editor

Following more than three hours of floor debate on Wednesday night, the Senate passed a revised version of the controversial $700 billion financial sector bailout plan, by a vote of 74 to 25. Both Presidential candidates, Senator John McCain and Senator Barack Obama, voted in favor of the plan that the House of Representatives must approve before it can be put into action. It is anticipated that the House will vote on Friday and proponents of the plan are optimistic that the vote will go their way.

The revised plan retains its key elements, which will essentially allow the U.S. Federal Government to buy up to $700 billion worth of troubled assets from financial institutions, with the objective of enabling them to start lending again, which in turn will get the economy moving. So, one might wonder why the House should now pass a bill which they rejected on Monday. The new bill has had a number of extras added to it, which lawmakers believe will “sweeten” the package. For one thing, the insurance cap for the Federal Deposit Insurance Corporation (FDIC) has been raised from $100,000 to $250,000 with the stipulation that the FDIC may not increase member bank premiums to compensate for the increased cap value. In the event of any losses occurring, the FDIC will be permitted to borrow from the Treasury to cover those losses. It is anticipated that this increased deposit insurance coverage will assist in boosting public confidence in the American banking system.

Additionally, the revised bailout plan includes three key tax-related elements, which are likely to garner House Republican support. The bill aims to extend to individuals and businesses a number of renewable tax concessions, including a tax deduction for the purchase of solar panels. Moreover, businesses would be given credit for research and development, as well as being given leave to deduct state and local sales taxes when submitting federal returns. Taxpayers will be given relief from the much-debated Alternative Minimum Tax for an additional year, thereby relieving millions of Americans from the burden of paying the so-called “income tax for the wealthy.”

In line with the original bill, the $700 billion would be made available to the Treasury in stages, with $250 billion becoming available immediately. Other similarities with the original bill include a number of provisions to protect taxpayers, such as initiating a bill obligating the financial sector to reimburse taxpayers for any net losses incurred from the program after five years. Moreover, the Treasury would be permitted to take ownership stakes in companies making use of the assistance offered. Further key issues addressed include reviewing remuneration and incentive bonuses paid to executives of troubled companies, as well as the setting up of oversight committees for implementation of the bailout plan.

While it seems likely that the $700 billion bailout plan will eventually be approved, debate rages on with valid arguments from both those for, and those against, this controversial and unprecedented measure. While American voters may have been influential in the House rejecting the plan on Monday, after the disastrous market results on Monday, which negatively impacted on pension and retirement funds, many are changing their minds. In the meantime U.S., as well as global, markets remain volatile and investors remain edgy.

 


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