How will the U.S. government spend the $700 billion bailout funds?

Pres. Bush addresses the nation on the economic crisis on Sept. 24, 2008. See more recession pictures.
Pres. Bush addresses the nation on the economic crisis on Sept. 24, 2008. See more recession pictures.
Nicholas Kamm/AFP/Getty Images

"Our entire economy is in danger," Pres. George W. Bush told Americans during an rare televised address to the nation on Wednesday, Sept. 24 [source: The Age]. The nation was already well aware. What had loomed as a meltdown in financial markets appeared to be trickling down to the average person. The sales of personal safes rose, as people sought a slightly better alternative to keeping money in failing banks or stuffing it in their mattresses [source: WDEF]. The collective entity that is America was jumpy; it seemed even a loud pop could send it into a panicked stampede.

Time was of the essence for passage of the Paulson Plan, named after Treasury Secretary Henry Paulson, who helped craft the proposal. The plan called for a $700 billion taxpayer bailout of financial institutions.


Not everyone agreed the plan was the best solution. One journalist concluded that the sweeping powers afforded to the government made the Paulson Plan "the financial equivalent of the Patriot Act" [source: New York Times]. CNN host Lou Dobbs questioned the use of taxpayer money to prevent a market correction: Some Americans would be paying to bailout the same institutions that were foreclosing on their homes [source: CNN].

After Bush's televised address, Congressional leaders continued marathon negotiations over the plan. The following Sunday, they announced the Emergency Economic Stabilization Act of 2008. Democrat leaders were confident it would be passed the next day. Instead, the bill suffered a surprise defeat, 228 to 205 [source: NPIA].

Two days later, the Senate deliberated a new version, adding "sweeteners" to make the bill more attractive. It was attached to a popular mental health bill. Expiring tax breaks were extended and middle-class tax relief was added. The Senate's bill also raised the Federal Deposit Insurance Corporation's guarantee on bank deposits from $100,000 to $250,000 [source: NPR]. ­The day it took up the bill the Senate passed their version, 74 to 25 [source: IBD]. On Friday, the House passed Senate amendment 5685, 263 to 171.

Find out what's inside the bailout on the next page.



Details of the Emergency Economic Stabilization Act

Democrat leaders (l-r) Rep. Barney Frank, Sen. Harry Reid, Speaker Nancy Pelosi, and Sen. Christopher Dodd) announce a tentative agreement on the EESA on Sunday, Sept. 28.
Democrat leaders (l-r) Rep. Barney Frank, Sen. Harry Reid, Speaker Nancy Pelosi, and Sen. Christopher Dodd) announce a tentative agreement on the EESA on Sunday, Sept. 28.
Chip Somodevilla/Getty Images

The Emergency Economic Stabilization Act (EESA) is the largest act of governance the U.S. financial markets have seen since the Great Depression. Under the EESA, the government is not a laissez-faire entity in American capitalism -- it becomes a major player.

Under the bill, the Office of Financial Stability (OFS), led by the Treasury Secretary, would be immediately authorized to use $350 billion in taxpayer money (raised through treasury bonds) to purchase bad debt from financial institutions in the form of mortgages and mortgage-backed securities (MBSs). The bill also authorizes the OFS to issue insurance policies on bad debts, in lieu of buying debt outright. After the first $350 billion is spent, the OFS can request two more sums -- $100 billion, followed by $250 billion -- both issued upon Congressional approval.


The EESA gives the government a lot of leverage to make demands on sellers from whom the OFS purchases bad securities. Institutions and firms that sell $300 million or more in debt instruments to the government are required to give the OFS a stake in their companies. These stakes, in the form of warrants, amount to shares in a company and protect the government on the back end. Because MBSs were divided and repackaged again and again, it's difficult to determine their value [source: USA Today]. If a seller benefits from the sale of its securities because the government paid a high price, the government will also reap the benefits since the shares it holds will rise in value. Companies shouldn't expect any windfalls; the OFS can refuse to purchase any debt for more than the seller originally paid [source: U.S. House].

Companies selling to the government and giving up a stake are subject to other conditions. Out of bounds are golden parachutes -- multi-million dollar severance packages for outgoing executive officers of failing companies. Under the EESA, any company in which the government holds a warrant as the result of the bailout is prohibited from granting golden parachutes to its top executives for as long as the government holds its stake [source: U.S. House].

The wording of the EESA consistently uses taxpayer protection as a benchmark for decision making. It directs the OFS to encourage lenders with which it's negotiating to refinance and restructure loans under the Hope for Homeowners Act (HOHA), passed in March 2008. This act issues new mortgages (structured in the borrower's favor) to replace those in danger of foreclosure. The HOHA is a voluntary program, however, and nothing in the EESA makes it compulsory.

Ultimately, the EESA could prove to be a boon for taxpayers. The act allows for the OFS to hold onto the bad securities until they regain their value. The OFS's ability to negotiate to stop foreclosures and infuse cash into the markets should theoretically stabilize the economy. Once stable, the securities the government purchased should increase in value and can be sold again at a higher price. The act could also harm taxpayers, since it's not guaranteed the government will make a return on such a large investment. If a shortfall occurs between the combined purchase and sale prices, the act calls for a proposal by the president to be submitted to force EESA-participating financial institutions to make up the difference. The act also requires proposals for new oversights of the financial markets.

Whether the bailout will be enough to fend off a major recession remains to be seen.


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  • Mantell, Ruth and Coombes, Andrea. "Bailout bill unveiled, heads to House." MarketWatch. September 28, 2008.
  • Mao, Vincent. "Stocks poised for weak start." Investor's Business Daily. October 2, 2008.
  • Silva, Mark. "Historic $700 billion bailout deal reached." Chicago Tribune. September 28, 2008.,0,2436591.story
  • Sorkin, Andrew Ross. "A bailout above the law." New York Times. September 22, 2008.
  • Temple-Raston, Dina. "Senate OKs bailout package, house to vote Friday." NPR. October 1, 2008.
  • Wagonner, John and Krantz, Matt. "Pricing mortgage-backed securities will be tough." USA Today. September 23, 2008.
  • Wingfield, Brian and Zumbrum, Joshua. "Bailout agreement reached." Forbes. September 28, 2008.
  • "Big bailout vote." CNN. October 1, 2008.
  • "Consumer news: safe sales on the rise." WDEF. October 1, 2008.
  • "Dodd announces 'Hope for Homeowners Act.'" Sen. Christopher J. Dodd. March 13, 2008.
  • "Emergency Economic Stabilization Act of 2008." U.S. House of Representatives. September 27, 2008.