House Nixes $700B Bailout; What's Next for Regulators?
Developing: In a U-turn from initial predictions last week that emergency financial bailout legislation proposed by Bush administration officials would soon be enacted, the House today defeated the package by a 228-205 vote, creating, at least for the moment, a brave new world for federal regulatory agencies.
U.S. Treasury Secretary Henry Paulson had predicted dire economic results if the legislation he and Federal Reserve Chairman Ben Bernanke began promoting heavily last week didn’t go forward quickly, and stock markets worldwide plunged in apparent reaction to the “no” vote in the House today on the aid package, which could cost an estimated $700 billion. The Dow Industrial average plummeted almost 780 points, a one-day record drop. However, a significant number of legislators on both sides of the aisle hesitated to approve pricey legislation that is perceived by many as rescuing corporate America from its own foolish financial decisions, while individuals struggle largely on their own to cope with the U.S. mortgage meltdown, according to the New York Times.
Another House vote on the same legislative package or a revised version could be taken later this week, and it remains to be seen whether the delay may lead to improvements the next time around.
A number of observers, including a Phoenix bankruptcy attorney, say the bailout proposal rejected today doesn’t address the underlying problem: Irresponsible lending has led to a huge number of mortgage foreclosures, and they in turn are wreaking havoc on property values as banks take over homes and eventually resell them at dramatically lower prices.
“I don’t think that they’re looking at real estate values and stability at all,” attorney Diane Drain tells radio station KTAR. “It has to be addressed. We’re ignoring the elephant sitting in the middle of the living room.”
To solve the current crisis, officials have to find a way to reform mortgage terms—and reduce principal balances—so that people can afford to continue living in their homes, she says.
But legislators, at least so far, have hesitated to give bankruptcy judges the power to reform mortgages by reducing the principal balances.
Additional and related coverage:
Los Angeles Times (editorial): “Allowing bankruptcy judges to reset mortgages might ease the credit crunch and energize lenders.”
London Times: “Analysis: bailout vote calls Hank Paulson’s bluff”
Los Angeles Times: “House bailout efforts minute by minute”
New York Times: “In Financial Food Chains, Little Guys Can’t Win”
ABAJournal.com: “Shareholder Suits in Uphill Battle Due to Current Financial Crisis”
