The U.S. Senate last night (Wednesday) passed a $700 billion banking-sector bailout package, and will now watch as the House of Representatives reviews the inducement-laden pact. The House rejected an earlier version of this bill on Monday.

The legislation, approved by a 74-25 vote, authorizes the federal government to buy problem financial assets from banks and other financial institutions that have been squeezed by a credit crunch that stems from a burst housing bubble that’s led to record home foreclosures. The new bill contains two political “sweeteners” that were included to get the House to reverse its earlier opposition to this plan: The first raises the limit on federal bank-deposit insurance; and the second underscores the authority of U.S. securities regulators to suspend asset-valuing rules that corporate executives blame for fueling the crisis.

Many analysts anticipate this bill will pass after the Dow Jones Industrial Average’s 778-point drop Monday provided very tangible evidence of the precariousness of the U.S. economy. The Senate vote didn’t start until after 7:30 p.m. EDT, last night. The hope is that the House of Representatives will then be ready to take action on this new bailout bill version on Friday, Bloomberg News reported.

“The big drop [in the Dow Index] really had a chilling effect on a lot of our members and a lot of their constituents,” House Republican Leader John Boehner, R-Ohio, told Fox News. With changes made by the Senate, the legislation “has a much better chance” of passage this time, he said.
In addition to a dramatic increase in public support, the amendments added to the bill the House rejected in an attempt to capture the support of skeptical Republicans, Congressional spokesman Kevin Smith told MarketWatch.com.

“We think we’ll have a better shot at passing this bill than we did on Monday,” said Smith, who is a spokesman for Boehner. “The bill has continued to get better from our standpoint.”

Officially called the Emergency Economic Stabilization Act of 2008, the revamped Senate bailout bill adheres to the core fix-it plan developed by U.S. Treasury Secretary Henry M. “Hank” Paulson Jr. and U.S. Reserve Chairman Ben Bernanke, a proposal that called for the federal government buy and hold so-called “toxic” mortgage assets, thereby freeing up funds for banks to begin lending again. It gives Paulson the $700 billion in phases, with $250 billion up front, another $100 billion pending presidential approval. The final outlay of $350 billion required Congressional approval.

However, the Senate package contains the following new measures that weren’t part of the House bill that was slapped aside with the help of House Republicans on Monday:

• An increase in the Federal Deposit Insurance Corp. (FDIC) deposit-insurance cap, boosting the level of government-guaranteed deposits from the current $100,000 to the new level of $250,000.

• A one-year “patch,” or relief, from the alternative minimum tax, or AMT, which is expected to save about 24 million households a combined $62 billion.

• Optional insurance for mortgage-backed securities, with financial institutions paying the premiums.

• A “Mental Health Parity” provision that provides insurance for mental illness.

• Roughly $17 billion in tax credits for the development of renewable energy such as wind and solar power.

• An extension of tax breaks that would save individuals and corporations roughly $150 billion over the next 10 years, as well as tax breaks for those impacted by natural disasters.

• The Senate bill also reiterates the U.S. Securities and Exchange Commission’s authority to suspend the so-called “fair-value accounting standard,” which requires companies to review assets and report losses if their values decline. Lawmakers, the American Bankers Association, and companies that include American International Group Inc. (AIG), have urged the SEC to suspend or ease the rule, saying it forces firms to report deeper losses than needed on assets such as subprime mortgages, Bloomberg said.
  

  Some Dems Won’t be Budged

  Of course, while the chances for a House approval have increased with the new provisions, there’s still no guarantee – and there are some hardliners who refuse to be swayed.

  “The bill that they are going to send back is the same bill that I voted against two days ago,” Rep. Joe Barton, R-Tex., said in an interview with Bloomberg Television. “Why would I turn around and vote for it?”

  Also some analysts argue that the sweeteners meant to appease House Republicans could turn off House Democrats, as many of the tax breaks being offered – especially the suspension of the AMT – are not fully offset by other tax revenue, meaning they are almost certain to boost the federal deficit.

  Fiscally conservative Democrats, often called Blue Dogs, could be scared off by generous tax breaks being tacked on to an already extravagant bill.

  “We’re going to have to be talking to them,” House Majority Leader Steny Hoyer, D-Md., told NBC’s The Today Show. “I’m not particularly pleased with that addition [to the bill] myself, very frankly.”

  While House Republicans made up the majority of opposition to the bailout on Monday – with two-thirds voting ‘Nay’ – roughly 40% of the House Democrats also voted against the bill, helping ensure its defeat.

  Monday Morning Quarterbacks

  The original bailout plan was shot down in the House of Representatives by a vote of 228-205, after House Republicans slammed the legislation as a Wall Street bailout financed by the U.S. taxpayer.

  Ahead of that vote, a great number of representatives had reportedly been overwhelmed with calls from their constituents, irate over the notion that the Wall Street firms that treated the economy with such a selfish disregard and a reckless abandon would be spared from failure by taxpayer dollars.

  However, when the bill died on the floor of the House Monday, there was no legitimate alternative standing by to restore functionality to the credit markets and save the U.S. economy from potentially stalling and diving into a severe recession. That was reflected by U.S. stock indices, which spiraled uncontrollably downward.

  The benchmark Dow suffered its biggest-ever one-day point loss, plunging 777.68 points on Monday, and shedding and losing 7% of its value. The broader Standard & Poor’s 500 Index skidded 106.59 points, or 8.79%, and the tech-laden Nasdaq Composite Index plummeted 199.61 points, or 9.14%.

  The collapse resonated throughout the country, and suddenly, a new wave of phone calls and letters came pouring into Washington – this time imploring policymakers to take action by approving legislation. E-mail traffic was so dense that it reportedly stalled Congressional computers.
  

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  FHA: Next Bailout? (naked capitalism, 10/9/09)

  Guest Post: The Ongoing Cover Up of the Truth Behind the Financial Crisis May Lead to Another Crash (naked capitalism, 10/16/09)

  Jim Chanos' Presentation: Ten Lessons From The Financial Crisis (market folly, 11/9/09)

  Read more on 2008 Financial Crisis at Wikinvest

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