Emergency Economic Stabilization Act of 2. The Emergency Economic Stabilization Act of 2. Division A of Pub. L. 1. 10–3. 43, 1. Stat. 3. 76. 5, enacted October 3, 2. U. S. financial system, is a law enacted in response to the subprime mortgage crisis authorizing the United States Secretary of the Treasury to spend up to $7. The funds for purchase of distressed assets were mostly redirected to inject capital into banks and other financial institutions while the Treasury continued to examine the usefulness of targeted asset purchases.[1][2] Both foreign and domestic banks are included in the program. The Act was proposed by Treasury Secretary. Henry Paulson during the global financial crisis of 2. President. George W. Bush on October 3, 2. Bailout ProvisionHistory[edit]The legislation had its origin in early 2. Secretary of the Treasury. Henry Paulson directed two of his aides, Neel Kashkari and Phillip Swagel, to write a plan to recapitalize the U. S. financial system in case of total collapse. The plan, which was also presented to Federal Reserve Chairman. Ben Bernanke, called for the U. S. government to purchase about $5. The original proposal was submitted to the United States House of Representatives, with the purpose of purchasing bad assets, reducing uncertainty regarding the worth of the remaining assets, and restoring confidence in the credit markets. The bill was then expanded and put forth as an amendment to H. R. 3. 99. 7.[4] The amendment was rejected via a vote of the House of Representatives on September 2. On October 1, 2. 00. Senate debated and voted on an amendment to H. R. 1. 42. 4, which substituted a newly revised version of the Emergency Economic Stabilization Act of 2. H. R. 1. 42. 4.[6][7] The Senate accepted the amendment and passed the entire amended bill, voting 7. Additional unrelated provisions added an estimated $1. See. Public Law 1. The amended version of H. R. 1. 42. 4 was sent to the House for consideration, and on October 3, the House voted 2. President George W. Bush signed the bill into law within hours of its congressional enactment, creating the $7. Troubled Asset Relief Program (TARP) to purchase failing bank assets.[1. Bailout 2008
TARP was dwarfed by other guarantees and lending limits; analysis by Bloomberg found the Federal Reserve had, by March 2. U. S. that year.[1. Supporters of the plan argued that the market intervention called for by the plan was vital to prevent further erosion of confidence in the U. S. credit markets and that failure to act could lead to an economic depression. Opponents objected to the plan's cost and rapidity, pointing to polls that showed little support among the public for "bailing out" Wall Street investment banks,[1. Senate forced passage of the unpopular version through the opposing house by "sweetening" the bailout package.[1. Economic background[edit]After the freeing up of world capital markets in the 1. Glass–Steagall Act in 1. Officially called the Emergency Economic Stabilization Act of 2008, this bailout bill surpassed any previous government bailout by hundreds of billions of dollars. · "When they passed Obamacare, they put a bailout fund in Obamacare. We led the effort and wiped out that bailout fund." —. Greenspan inspired "self- regulation") along with monetized subprime mortgages sold as no risk investments, reached a critical stage during September 2. In response, the U. S. government announced a series of comprehensive steps to address the problems, following a series of "one- off" or "case- by- case" decisions to intervene or not, such as the $8. American International Group on September 1. Fannie Mae and Freddie Mac, and the bankruptcy of Lehman Brothers. On Monday, October 6, the Dow Jones Industrial Average dropped more than 7. The same day, CNN reported these worldwide stock market events: [2. Britain's FTSE 1. Index was down 7. Germany's DAX down 7. France's CAC 4. 0 dropping 9%In Russia, trading in shares was suspended after the RTS stock index fell more than 2. Iceland halted trading in six bank stocks while the government drafted a crisis plan. Paulson proposal[edit]U. S. Treasury Secretary. Henry Paulson proposed a plan under which the U. S. Treasury would acquire up to $7. The plan was immediately backed by President George W. Bush and negotiations began with leaders in the U. S. Congress to draft appropriate legislation. President Bush meets with Congressional members, including presidential candidates John Mc. Cain and Barack Obama, at the White House to discuss the bailout, September 2. Consultations among Treasury Secretary Henry Paulson, Chairman of the Federal Reserve. Ben Bernanke, U. S. Securities and Exchange Commission chairman Christopher Cox, congressional leaders, and President Bush, moved forward efforts to draft a proposal for a comprehensive solution to the problems created by illiquid assets. News of the coming plan resulted in some stock, bond, and currency markets stability on September 1. The proposal called for the federal government to buy up to US$7. The draft proposal was received favorably by investors in the stock market, but caused the U. S. dollar to fall against gold, the Euro, and petroleum. The plan was not immediately approved by Congress; debate and amendments were seen as likely before the plan was to receive legislative enactment.[2. Throughout the week of September 2. Congress over the terms and scope of the bailout,[2. Washington Mutual, and the upcoming November 4 national election. On September 2. 1, Paulson announced that the original proposal, which would have excluded foreign banks, had been revised to include foreign financial institutions with a presence in the United States. The U. S. administration pressured other countries to set up similar bailout plans.[2. On September 2. 3, the plan was presented by Paulson and Bernanke to the Senate Banking Committee, who rejected it as unacceptable.[3. On September 2. 4, President Bush addressed the nation on prime time television, describing how serious the financial crisis could become if action was not taken promptly by Congress.[3. Also on September 2. Republican Party nominee for President, John Mc. Cain, and Democratic Party nominee for President, Barack Obama, issued a joint statement describing their shared view that "The effort to protect the American economy must not fail."[3. The plan was introduced on September 2. Paulson. Named the Troubled Asset Relief Program,[2. Paulson Proposal or Paulson Plan, it should not be confused with Paulson's earlier 2. Blueprint for a Modernized Financial Regulatory Reform,[3. March 3. 1, 2. 00. The proposal was only three pages long, intentionally short on details to facilitate quick passage by Congress.[3. Mortgage asset purchases[edit]A key part of the proposal is the federal government's plan to buy up to $7. MBS) with the intent to increase the liquidity of the secondary mortgage markets and reduce potential losses encountered by financial institutions owning the securities. The draft proposal of the plan was received favorably by investors in the stock market.[2. This plan can be described as a risky investment, as opposed to an expense. The MBS within the scope of the purchase program have rights to the cash flows from the underlying mortgages. As such, the initial outflow of government funds to purchase the MBS would be offset by ongoing cash inflows represented by the monthly mortgage payments. Further, the government eventually may be able to sell the assets, though whether at a gain or loss will remain to be seen. While incremental borrowing to obtain the funds necessary to purchase the MBS may add to the United States public debt, the net effect will be considerably less as the incremental debt will be offset to a large extent by the MBS assets.[3. A key challenge would be valuing the purchase price of the MBS, which is a complex exercise subject to a multitude of variables related to the housing market and the credit quality of the underlying mortgages.[3. The ability of the government to offset the purchase price (through mortgage collections over the long- run) depends on the valuation assigned to the MBS at the time of purchase. For example, Merrill Lynch wrote down the value of its MBS to approximately 2. Q2 2. 00. 8.[3. 8] Whether the government is ultimately able to resell the assets above the purchase price or will continue to merely collect the mortgage payments is an open item. On February 1. 0, 2. Secretary of the Treasury Timothy Geithner outlined his plan to use the $3. TARP funds. He mentioned that the U. S. Treasury and Federal Reserve wanted to help fund private investors to buy toxic assets from banks, but few details have yet been released.[3. There is still some scepticism about the premise that taxpayers can buy troubled assets without having to overpay. Oppenheimer & Company analyst Meridith Whitney argues that banks will not sell bad assets at fair market values because they are reluctant to take asset write downs.[4. Removing toxic assets would also reduce the volatility of banks' stock prices. Because stock is a call option on a firm's assets, this lost volatility will hurt the stock price of distressed banks. Therefore, such banks will only sell toxic assets at above market prices.[4. On April 6, 2. 00. State Foreclosure Prevention Working Group reported that the pace of foreclosures exceeded the capacity of homeowner rescue programs, such as the Hope Now Alliance, in the first quarter of 2. Sweeping powers[edit]The original plan would have granted the Secretary of the Treasury unlimited power to spend,[2. Section 8 of the Paulson proposal states: "Decisions by the Secretary pursuant to the authority of this Act are non- reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."[2. This provision was not included in the final version. Potential effects[edit]The maximum cost of a $7. American (based on an estimate of 3. Americans), or $4,6. American (based on an estimate of 1. The bulk of this money would be spent to purchase mortgage backed securities, ultimately backed by American homeowners, which possibly could be sold later at a profit, by the government. Economist Michael Hudson predicts that the bailout would cause hyperinflation and dollar collapse.[4.
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