Behind The Scenes: How Congressional Conservatives Induced Financial Crisis

When Treasury Secretary Henry Paulson called congressional leaders early last week to ask for $700 billion in public funds to buy distressed loans and securitized loans from the nation's failing financial institutions, he was told that such a package could pass only with bipartisan support. Members of Congress from both parties who faced tight reelection fights could not be relied on for support. The leadership on both sides of the aisle would have to join hands and jump off the cliff together. Each party in each of the two houses would have to provide roughly half the votes needed for passage. Paulson, White House negotiators, and the bipartisan, bicameral leadership of Congress agreed and sat down to piece together a package that no one liked but everyone recognized was necessary.

For the first time since the weeks following the September 11 terrorist attacks, the Bush administration and Congress began to work together in a constructive and bipartisan spirit. But by Thursday it was apparent that the same radical faction within the House Republican Conference that has derailed responsible policy for nearly two decades was at work again--even though the proposal at stake was being put forward by their own president and supported by their party's presidential nominee.

When Speaker Nancy Pelosi insisted on bringing the House back into session on Thursday morning last week after a meeting of the Republican Conference had extended well beyond its scheduled time period, she was warned by Republican leadership staff that if she did so the Republican leaders who would return would not be those she had been working with all week.

As I pointed out in a column posted on Friday, an organization within the House Republican Conference used by former Rep. Tom DeLay in his rise to leadership, the Republican Study Committee, has been threatening for some time to dump Minority Leader John Boehner (R-OH) for being too moderate. In their mind, the "bailout package" presented a perfect opportunity to make their move. Boehner did the only thing he could do under the circumstances and reversed field.

That created the first crisis in the effort to get a recovery package to the president's desk before the scheduled adjournment. Senior White House officials were deployed to smooth the waters and bring the errant renegades back into line. Potential Boehner adversary Congressman Eric Cantor (R-VA) was brought more directly into the negotiations. Minority Whip Roy Blunt of Missouri, another likely candidate against Boehner, was put directly in charge. A hair-brained scheme by Rep. Paul Ryan (R-WI) to force financial institutions to pay more insurance on their deposits--payments that the federal government would be likely to have to lend money to the institutions in order for them to make the payments--was incorporated into the bill. President George W. Bush agreed to address the country and underscore the importance of the package to the country.

Working through the weekend, Democratic and Republican leaders in both the House and Senate signaled to the White House that they had a deal. Senate Majority Leader Harry Reid (D-NV) and his counterpart Sen. Mitch McConnell (R-KY), who himself is facing a tough reelection battle in his home state, both indicated that they had more than enough votes to pass the measure in the Senate. House Democrats said they were certain that they could muster more than 100 votes, and Blunt, the chief Republican vote counter in the House, indicated that he had 100 votes. All parties left the table with optimism that the grueling effort to construct a package that met the needs of the financial system and the political parameters required for passage were finished.

Later Sunday evening, Blunt, who was not only the lead negotiator for House Republicans but also their top vote counter, called the office of Democratic Whip Jim Clyburn (D-SC) to report that Republican support stood at 90 votes. The following morning, however, Blunt approached Clyburn on the floor to report that Republican strength might be as low as 80. The House leadership contacted Secretary Paulson to say that despite the agreement that Republicans were to provide a proportionate share of the votes, they were working the Democratic Caucus to see if they could find Democrats to make up the difference for the Republican defections. The outcome at that point, however, was uncertain.

Paulson said they should proceed with the bill. He obviously recognized that an announcement that there were insufficient votes to move the package, and that the vote had to be delayed, would shake the already uneasy markets. The decision was made to move forward. A loss would be little worse than a delay in terms of market sentiment, but it would at least provide the White House, the public, and the business community with a list of the problem members before the proposal was reconsidered later in the week.

Blunt would contact the Democratic Leadership yet another time after consideration of the bill had begun, to report that his whip total added to only 65. The problem facing the Republican leadership was apparent shortly after the debate began. The leader of the revolt against his party's president, Treasury secretary, presidential nominee, and leadership in both Houses of Congress was Jeb Hensarling (R-TX), the chair of the Republican Study Committee. He told the House of Representatives:

"...The Paulson plan should never have been our only option...I fear that under this plan, ultimately the Federal Government will become the guarantor of last resort and...that does put us on the slippery slope to socialism. If you lose your ability to fail, soon you will lose your ability to succeed."

Hensarling was joined by Republican Study Committee member Thaddeus McCotter (R-MI), who told the House:

"It has always been the temptation in a crisis especially to sacrifice liberty for short-term promises of prosperity, and it was no mistake that during the 1917 Bolshevik Revolution the slogan was 'peace, land and bread.' Today you are being asked to choose between bread and freedom. I suggest that the people on Main Street have said that they prefer their freedom, and I am with them."

Blunt's final vote count had been almost on the money. When all time had expired he had 66 Republican green lights on the big tally board on the wall behind the House Press Gallery against 133 red lights posted by Republicans who had denied the united pleas of their normally fractured leadership. The Democrats put up 140 votes. Had any of Blunt's earlier vote counts proven correct, or if the promises made by House Republican leaders during the bargaining sessions proven correct, the unexpectedly strong Democratic vote would have been more than enough to pass the measure. It was about 30 more votes than had been promised.

At the request of the Republican leadership, the chair refrained from gaveling the roll call to an end and left the tally board open after all time had expired. President Bush was on an open line in the House Republican Cloak Room talking to any of the defectors who would listen. The White House needed to switch 12 votes but in the end no votes were changed. By the end of the day the Dow Jones Industrial Average had lost 777 points, or more than 7 percent of its value. Other indexes were down by larger amounts and the total loss in the capitalization of American business was $1.2 trillion--70 percent more that the price of the legislation that had just been defeated.

The radical elements within the Republican Conference who had sent their leadership back to the bargaining table to negotiate policy concessions that neither the Bush administration nor congressional Democrats or even Senate Republicans thought were sensible walked away from the concessions they had won and the clear need for timely action to prevent a potential meltdown of the nation's banking system.

So where do these shenanigans leave the country and the world financial system? One option is to make further concessions to Democrats, who recognize the need for intervention but think the current package is not balanced enough in terms of addressing the needs of ordinary Americans. That would result in some Republican defections, but attract possibly enough Democratic support to offset Republican losses and the 12 additional votes required to send the measure to the Senate.

A better solution, however, is to keep the plan bipartisan. The American business community has been the mainstay of Republican Party finances for generations. Little effort was expended by that community before the House vote, largely because business leaders thought it impossible that such a large portion of those with whom they had been allied for so many years could act with such total disregard for the consequences to the economy. That assessment is changing. Following the floor vote the U.S. Chamber of Commerce sent members of Congress a letter stating the following:

"Today's failure to approve legislation addressing the financial crisis has resulted in uncertainty and turmoil that have dramatically affected the markets, and lowered equity prices, eroding individual savings and destroying billions of dollars of household wealth.

Make no mistake: when the aftermath of Congressional inaction becomes clear, Americans will not tolerate those who stood by and let the calamity happen. If, on the other hand, Congress supports a plan to successfully restore the financial system and preserve the flow of credit to the economy, the American people will recognize that act of courage.

The Chamber urges Congress to immediately pass financial rescue legislation. The Chamber will score votes on, or in relation to, this issue in our annual How They Voted scorecard."

Nearly all of America's corporations recognize the enormous risk posed to the U.S. economy and the global economy as a result of the reckless actions of those who have represented themselves over the years as stalwart allies of business. They have a responsibility to resolve this situation and assure the White House and leaders in Congress that the votes will be there when Congress reconvenes later this week.

Scott Lilly is a Senior Fellow at the Center for American Progress Action Fund. This article first appeared at AmericanProgress.org.

Comments

[Pdubya]

and you tell me one good reason why Americans need MORE CREDIT AND DEBT?

WE NEED MORE PRODUCTION, SAVINGS, AND JOBS.

THAT CAN NOT BE FIXED BY ADDING MORE DEBT.

NO ONE IS ADDRESSING THE DESTRUCTION OF THE DOLLAR BY DOING ANY KIND OF BAILOUT.

[Pdubya]

Why do you not give credit where credit is due? WE THE PEOPLE called and wrote millions of times. The GOP on the Hill buckled because of our calls, either from political pressure (they're up for re-election) or from sharing economic philosophy with their constituents. That said, I called at least 20 representatives from both camps. Remember, many Democrats voting No as well.

You say: "Make no mistake: when the aftermath of Congressional inaction becomes clear, Americans will not tolerate those who stood by and let the calamity happen. If, on the other hand, Congress supports a plan to successfully restore the financial system and preserve the flow of credit to the economy, the American people will recognize that act of courage."

No, we didn't tolerate it because we DO understand the calamity that would ensue with ANY money being injected into our system. We understand that fiat currency (inflation) can not fix inflation. We understand that Freedom is worth fighting for. We understand that we may have to give up some bread in the short term (a deep recession by allowing the market to correct itself in a year) is a far better option that dumping worthless federal reserve notes into our economy, causing hyperinflation and bringing on a decade long depression.

[milo h minderbinder]

And sometimes the public is stupid and asks their representatives to do stupid things.

Viva democracy.

[Pdubya]

We understand the real culprit, the Federal Reserve monetary policy of central banking based upon fiat money. We understand that HR 2755 - Abolishing the Fed would be the best way to shore up our system. We understand a return to sound money will allow us to keep our liberties. We understand representatives like Kaptur (D-OH) and Kucinich (D-OH) and McCotter (R-MI) understand what is at stake.

But the MSM and every Congressman that has received special interest money and money from overseas banks, those on wall street who have profited from this ponzi scheme, and the very international bankers that are running the show are trying to preserve their system, not ours. Giving us ownership to bad assets in hopes that they will become profitable is a pipe dream.

If I were to try and sell you a car and you found out it didn't work, would me lowering the price help it run?

"Allow me to issue and control a nation's money and I care not who writes its laws!" Amshell Rothschild

We are seeing the Keynesian economics in its death throws. Let it die. It is in a coma and it won't come out.

Return to our Constitutional money and have only Congress issue it. End the Fed.

[sparafucilli]

This is not just a crisis. This is a sea change. After Iraq and this America's position in the world will no longer be paramount. It will take the better part of the next administration to get through this because what we are seeing is merely the TIP of the iceberg. We are now talking about "America's Fall from Grace".

http://www.theglobeandmail.com/servlet/story/RTGAM.20080930.wcogray01/BNStory/specialComment/

[larry278]

W & Paulson ain't gettin no money, no how, Tom De Lay & RSC or not. Get over it.

[RTIII]

Make no mistake: We don't need this bailout.

The more they try to force it upon us, the more clear it becomes it's an attempt at outright theft.

The Dems may make a HUGE mistake: If they go for this bailout, they jeopardize their entire slate this election - with the possible exception of the top of the ticket itself.
.

[nomobull]

aND IF YOU ARE WRONG

[RTIII]

It appears that so far I am not wrong.

There has been no articulated vision of the impending disaster. It's all scare tactics.

My view at the moment is that we are aware of plenty of problems, all of which are a direct result of deregulation. We should _immediately_ repeal _all_ of the deregulation since REAGAN took office. And I Mean All Of It.

Meanwhile, if things continue to get worse, we should next abolish the Federal Reserve as we know it today and put our currency back in The People's Hands. ...You DO realize the Fed is PRIVATE, don't you? ...A NEW Fed - a people-owned Fed, could then be seeded with tens or hundreds of billions, as needed, and create _new_ debt in which the banks owe us for their NEW ventures.

This is a reasonable, measured reaction to what we have in front of us today. The panic driven, knee-jerk response of immediately giving the criminals everything they asked for is just plain -ahem- stupid.
.

[ProudLiberalDemocrat]

If you use credit in any way (credit card, mortgage, auto loan), then you' need a bailout.

If your employer uses any credit, you may be impacted.

Phil Gramm, the father of deregulation and the credit default swap is the reason the system is broken.

What you're not being told about the problem (because it's a stupidly complex financial product) is that the credit default swaps (insurance for mortgage backed securities) were issued beyond the underlying securities. This is like having 10 health insurance policies and expecting them all to pay your doctor. DEREGULATION of Credit Default Swap, the child of Phil Gramm, created this mess.

Blame Republicans.

[DaCoach]

Even the word Bailout smells to high heavens. Let's just call it a loan. No giveaways. No forgiveness of debt any more than any middle American would have to endure. And, along with any loan, the banks will be forced to sign over any assets, including company stock to secure the loan. And, since the debt is secured, we, the people who loan the money will have rights to set reasonable pay standards for the executives.

Paulson is disqualified from making policy in the process because he wasn't capable of preventing the meltdown in the first place. Until those provisions are part of the program, no bailout. Go broke for all I give a damn. I'd rather we suck up a small recession than mortgage the future for many years trying to pay off our debt to another foreign country.

[metalpipe]

And if you call this socialism, you are forgetting what this country is made of. Entrepreneurs who would never allow a ful blown socialist govt to take over. Facism is what we should fear, not a tax payer focused package that will address our immediate needs AND ensure the system is corrected to never allow this to happen again. This bill just needs more work.

Kudos on your post, coach.

[ChaoticGood]

The problem began from the top down and the solution must begin from the bottom up. The biggest problem with the bailout is that the derivatives cannot be adequately priced. Because of this, the government will have no idea what to pay for them. There is no practical way to price them so some formula will probably be employed. Even if this works, it will encourage radical behavior on the part of speculators. The core problem is the drop in valuation of housing due to foreclosures. So it is obvious that to begin to fix the problem, we must stop forclosures on primary residences.
In order to give value to the housing based securities, we should help homeowners pay the mortgages so they can stay in their homes. This will instantly stabilize the market and allow the fury of destabilization to subside. Simple fix...

[metalpipe]

Nice points, but without job creation and a balanced trade deficit, nothing will work.

[MourningDude]

"he was told that such a package could pass only with bipartisan support. Members of Congress from both parties who faced tight reelection fights could not be relied on for support."

There you have it. Dems would rather see the country go down the tubes than take responsibility for saving it.

And according to the AP today, of the 94 Dems that voted NAY, only 8 were involved in close fought re-election campaigns. The other 86 weren't at risk of losing their jobs in November, so the Dems' thesis and your own are fatally flawed.

Also according to the AP, Dems reported that they felt no pressure from their leaders to support the legislation. All they needed was 12 more votes, and they didn't bother to ask for them. They didn't twist any arms.

If you accept the premise that this bill MUST be passed in a bipartisan vote, then perhaps the rest of the machinations you go through may be meaningful. But that premise is wrong, and thus all the rest is just noise.

[Yermammy]

Talk about noise! lol Yours is not only loud, but discernibly screechy. I congratulate the Brave Democrats that voted NO on this bill. The fact that their seats WEREN'T in danger, tells me they listen to the voters they REPRESENT. That's the key part you jokers fail to point out. Wow, representatives that actually listen to their constituents! What a novel idea :) Hat's off to the Brave Democrats!

[RTIII]

I agree with you.

I don't understand why so many people have drunk the bail-out Kool-Aid. Many have lost their senses. Heck, I've even been accused of being Republican for saying I didn't want the buy-out! I guess some people lose their sense of reason when they panic.
.

[MyVoiceHere]

Like every bill that is touted as important for the country and cries come in to oppose, here is some new information coming in after the failure of the bill on Monday. Here is an excerpt from an article:

Staffers from both parties met throughout the day to hash out options. Some, but not all, congressional offices " of both parties " reported that the vitriol of callers had shifted from people outraged at the bailout plan to people outraged that it had failed.

"It"s not hard to understand why," a leadership aide said. "The S&P lost 9 percent [on Monday]. A middle-class family with $100,000 in a 401(k) that is tied to the S&P lost $9,000."

That thinking shows the political shift that is taking place in some corners since the surprise failure of the bailout package Monday. An ABC/Washington Post poll found that 88 percent of registered voters are concerned that the vote could lead to a more severe economic decline.

http://thehill.com/leading-the-news/picking-up-the-pieces-2008-09-30.html

[Lancer 101]

It"s a sad thing to admit: we no longer trust our government or elected officials. They"ve failed miserably; now in the worst financial crisis since the depression.

Corporate criminals, greedy investors, money hungry bankers, congress and the administration are to blame. Forced into a war by the administration"s lies and deception, our elected officials have allowed the erosion of our constitutional rights. They"ve failed to address the needs of our veterans and soldiers returning from the war; they"ve ignored rising health care costs that force hard-working Americans into bankruptcy. Failure!

They"ve have failed with our tax dollars:

¢ Since 2001, pork barrel totaled nearly $171B!
¢ The federal deficit continues to grow at $2.3B per day!
¢ Our national debt is now nearing $10 trillion!
¢ Every American owes over $32,000!!
¢ More than 25% of the national debt is owed to China, Russia, Japan, Saudi Arabia and Brazil.

Failure! But they have taken care of themselves. Look at their incomes, retirement benefits and free health care! They spout more of the same diluted rhetoric and make false promises.

This $750 B banker bailout is worrisome. I don"t trust those who did this because they"ve failed and will do so again.

In the public and private sector, when someone doesn"t do their job, they get fired!! So should these elected incompetents. We need new representatives; strong term limits should be imposed; and enforceable ethics reform enacted. Sounds like a great platform to march on Washington for!

Albuquerque, NM

[vegas9999]

WELL SAID!!!

[sparafucilli]

Reminds me of the "prisoner's dilemma" scenario where everyone is out for themselves. Society was betrayed by those guys and as a result we'll all have to spend serious time in a debtor's prison of our own making. In the latter part of the 18th century the French nobility paid the ultimate price for their folly. Similar fates should befall those who perpetrated this disaster. But there won't be any reckoning. In fact we are thinking about bailing these guys out. In any case they'll be long gone spending their ill gotten gains in The Riviera while those at home will be digging in the rubble.

[US Patriot]

Why should the Democrats who control the US congress be re-elected when their approval rating is currently less than 9%, the lowest in US History?

What have they done in the past couple of years that has actually helped Americans and our economy?

[RI]

Because with a better majority and without the vetoer in chief, they might get something done.

[RoloTomassi]

Why should GOPers in congress be re-elected when they've used every method available to block the majority of meaningful legislation presented in the last two years by democrats? I think that's a far more compelling question, and I believe you'll see come November 4th that most of the country agrees with me....

[Zeje]

And you will see how much is "changed" The Democrats are as bad as the Republicans. Actually, some of the Republicans at least know that this bail out will not do a damn thing to help Americans.

[Russycle]

Note the threatening letter from the US Chamber of Commerce at the end of the story. My daughter did an internship there, the CoC is basically a lobby for corporate America. No surprise that they're PO'd by the bailout failure. Actually makes me feel better that this deal cratered.

[Mock38]

The Know Nothings in the House (the 95 Dems and majority of Republicans) had a field day Monday. They know nothing of seized-up credit markets and real economic pain.

A plan will be passed soon.

Even with a plan, the economy is in a contraction mode and is in for a long-term correction.

Alan Greenspan's Fed and the White House with help from a compliant Congress are the main culprits for the current debacle.

Obama wants a plan passed, and that is good of enough for me, and should be good enough for Jessie Jackson Jr and his ilk.

[RTIII]

No, it's just another disaster compounding the troubles of the first.

The bailout does NOTHING to fix the real problems.
.

[nomobull]

and doing nothing will yield what result.

[breakfast]

It is not a plan, it is a scheme and it does nothing to address the underlying causes of the problems, which are real and serious.

Obama is just another establishment candidate.

[Zeje]

Obama wants the plan passed -- and that's good enough to convince me not to vote for him.

[Pdubya]

www.votepact.org

www.campaignforliberty.com

come join the blue, the red, the green, the purple. come join americans.

[Snowball]

I think it's clear from all the political posturing a maneuvering that McCain and the Republicans have been up to over this crises caused by the implementation of their own lassiez faire ideology that they're trying to hang responsibility for an unpalatable solution around the necks of the Democrats. That's why they got into such a lather over Pelosi's floor speech. When someone keeps insisting that you shouldn't look back and attribute responsibility for a disaster, you can be pretty sure that they caused it.