On Sept. 16, American International Group, an insurance giant on the verge of failure because of its exposure toexotic securities known as credit default swaps, was bailed out by the Fed in an $85 billion deal. Stocks droppedanyway, falling nearly 500 points.
The Government’s Bailout Plan
The bleeding in the stock market stopped only after rumors trickled out about a huge bailout plan being readiedby the federal government. On Sept. 18, Treasury Secretary Henry M. Paulson Jr. publicly announced a three-page, $700 billion proposal that would allow the government to buy toxic assets from the nation’s biggest banks,a move aimed at shoring up balance sheets and restoring confidence within the financial system.Congress eventually amended the plan to add new structures for oversight, limits on executive pay and theoption of the government taking a stake in the companies it bails out. Still, many Americans were angered by theidea of a proposal that provided billions of dollars in taxpayer money to Wall Street banks, which many believedhad caused the crisis in the first place. Lawmakers with strong beliefs in free markets also opposed the bill,which they said amounted to socialism.President Bush pleaded with lawmakers to pass the bill, but on Sept. 29, the House rejected the proposal, 228 to205, with an insurgent group of Republicans leading the opposition. Stocks plunged, with the Standard & Poor’s500-stock index losing nearly 9 percent, its worst day since Oct. 19, 1987.Negotiations began anew on Capitol Hill. A series of tax breaks were added to the legislation, among other compromises and earmarks, and the Senate passed a revised version Oct. 1 by a large margin, 74 to 25. OnOct. 3, the House followed suit, by a vote of 263 to 171.When the bill passed, it was still unclear how effective the bailout plan would be in resolving the credit crisis,although many analysts and economists believed it would offer at least a temporary aid. Federal officialspromised increased regulation of the financial industry, whose structure was vastly different than it had been justweeks before.The first reactions were not positive. Banks in England and Europe had invested heavily in mortgage-backedsecurities offered by Wall Street, and England had gone through a housing boom and bust of its own. Lossesfrom those investments and the effect of the same tightening credit spiral being felt on Wall Street began to put agrowing number of European institutions in danger. Over the weekend that followed the bailout’s passage, theGerman government moved to guarantee all private savings accounts in the country, and bailouts were arrangedfor a large German lender and a major European financial company.When stock markets in the United States, Europe and Asia continued to plunge, the world’s leading centralbanks on Oct. 8 took the drastic step of a coordinated cut in interest rates, with the Federal Reserve cutting itstwo main rates by half a point.And after a week in which stocks declined almost 20 percent on Wall Street, European and American officialsannounced coordinated actions that included taking equity stakes in major banks. The action prompted aworldwide stock rally, with the Dow rising 11 percent on Oct. 13.
The Crisis and the Campaign
The credit crisis emerged as the dominant issue of the presidential campaign in the last two months before theelection. On Sept. 24, as polls showed Senator John McCain’s support dropping, he announced that he wouldsuspend his campaign to try to help forge a deal on the bailout plan. The next day, both he and Senator BarackObama met with Congressional leaders and President Bush at the White House, but their efforts failed to assurepassage of the legislation, which went down to defeat in an initial vote on Sept. 29, a week before it ultimatelypassed.
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