TOPICS > Economy

Rescue Bill Failure Shocks Wall Street

September 29, 2008 at 6:15 PM EDT
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The House defeated a $700 billion rescue package Monday, causing serious turmoil on Wall Street. A panel of reporters discuss the implications of the rescue rejection.

JIM LEHRER: And to Margaret Warner.

MARGARET WARNER: After the markets closed, after one of the worst days in Wall Street history, the architect of the bailout plan, Treasury Secretary Henry Paulson, spoke to reporters outside the White House. He vowed to try again.

HENRY PAULSON, U.S. Treasury Secretary: I will continue to work with congressional leaders to find a way forward to pass a comprehensive plan to stabilize our financial system and protect the American people by limiting the prospects of further deterioration in our economy. We’ve got much work to do, and this is much too important to simply let fail.

MARGARET WARNER: For a closer look at what happened on the Hill today, the reaction on Wall Street, and what’s next, we turn to four reporters who are covering different parts of this story.

Jeanne Cummings covers Washington political and financial matters for John Shaw covers Congress for Market News International, a global wire service that reports on financial markets. Krishna Guha is chief U.S. economics correspondent for the Financial Times. And Joe Nocera, we hope to be joined by, is a business columnist for the New York Times. He’s also the editor of the paper’s Executive Suite blog.

Welcome to all of you.

John, let’s begin with you because you were in the chamber watching this unfold. What was it like?

JOHN SHAW, Market News International: It was a remarkable moment. I think, going into the vote, there was the general view that the package would pass narrowly, but neither party was trusting the other. In fact, all eyes were up on the board.

So there was a very careful calculation going on as to how many Democrats and how many Republicans were going to vote for it.

And as the set-up piece notes, there was the view by the Democratic leadership that they were willing to do some of the heavy lifting, but not all of it, and they were looking for about half the votes from the Republicans. And so that was a very intense focus for the speaker.

MARGARET WARNER: But what could you see looking down, as the vote started to go down?

JOHN SHAW: Well, it was very interesting, because it’s hard to know really how each party does their whipping operations, getting votes, but the Democratic side was much more active.

The speaker was right in the middle of it. There were swarms of people around her. They were feeding her notes. She was carefully monitoring the vote. She was sending emissaries over to the Republican side.

On the Republican side — and, again, they may do it differently — but the minority leader, John Boehner, was pretty much alone. It didn’t seem like many people wanted to talk to him. Roy Blunt, the whip, was pretty much standing off by himself. His deputy, Mr. Cantor, was also pretty quiet.

So visually it looked like the Democrats were working harder. And at one point, Pelosi looked over and saw that not a lot of movement was going on that side. And she just said, in a very loud voice, “We’re finished,” which signaled that she was done trying to get more Democrats to vote for the package.

Factors behind the repudiation

Jeanne Cummings
We had politics at play here. Many of these no votes came from members who are in tight races. And they are really going to need the base to come out.

MARGARET WARNER: And, Jeanne, in fact, we only had 60 percent of the Democrats vote for it, 40 percent against, and only a third of the Republicans. That's a pretty wide repudiation. What do you think happened? What was behind this?

JEANNE CUMMINGS, Well, I think we had a combination of things going on. We had -- ideology was a problem. This was totally against where some of the free-market Republicans would ever want to be.

We had politics at play here. Many of these no votes came from members who are in tight races. And they are really going to need the base to come out.

And I was hearing that their calls were like 99 percent to 1, you know. It was the local community bankers who were saying, "Please do this, because we're next." But otherwise it was very negative public response to this.

And then, of course, we had some partisan petulance. I mean, it was sort of Washington at its worst. It was a really toxic mix.

MARGARET WARNER: Now, the question that the people keep asking is, how could they have brought to it the floor without knowing they had the votes? What was the situation there? Did the Democratic leadership think it had the votes?

JEANNE CUMMINGS: Well, frankly, if you listened to the comments from these leaders afterwards, they would have had a reason to think they had the votes, because John Boehner said he had the 12. He said he had the 12 and they went south on him. And they only needed 12 more to pass it.

MARGARET WARNER: Does your reporting suggest that's the case?

JEANNE CUMMINGS: Well, I'm not sure if he really had the 12. But Nancy Pelosi was asked about this. And she said, clearly, if she had been told that was the number of Republicans who were going to vote for this, she would not have brought the bill to the floor.

JOHN SHAW: The one sort of small irony is, just moments before the House vote, there was actually a little bit of a squabble on the Senate floor in which the majority leader, Harry Reid, said the House will pass this momentarily. We'll vote on it Wednesday.

And Mitch McConnell, the Republican leader, said, "Let's vote on it tonight." And there was a back-and-forth in which McConnell was saying, "Let's not wait until Wednesday. Let's do it tonight."

Then Pete Domenici, a veteran stepped in, and said, "If this thing is out here too long, it might pass." You know, he was also urging an immediate vote.

So the Senate leadership was very certain that they were going to be getting the bill this afternoon.

Markets reflect investors' panic

Krishna Guha
Financial Times
The stock market, of course, isn't the core of this problem. The core is in the credit markets and the money markets that have completely seized up in recent days, putting enormous stress on banks and other financial institutions.

MARGARET WARNER: Now, Krishna Guha, the U.S. stock markets, the Dow was down 775 points or more. Does that -- is that an accurate reflection of how investors were feeling as they watched this unfold?

KRISHNA GUHA, Financial Times: I think it is. I mean, the investors around the world, not just here in the U.S., are frankly terrified at the thought that this bill or something like it might not get passed.

The stock market, of course, isn't the core of this problem. The core is in the credit markets and the money markets that have completely seized up in recent days, putting enormous stress on banks and other financial institutions.

But investors in the stock market know that, if the financial system gets into even more severe trouble, the whole economy will follow it.

MARGARET WARNER: Joe Nocera, I've gathered you've joined us.

JOE NOCERA, Business Columnist, New York Times: I certainly have.

MARGARET WARNER: Great. I'm glad to see you. What was the mood on Wall Street today as you divined it?

JOE NOCERA: Well, I mean, it was shock. People were stunned that it didn't pass. There had been an expectation that the fight was late last week and over the weekend, as the House Republicans, you know, put their foot down and said, "We won't allow this to go forward in the way that it is currently conceived."

So they spend the weekend working on it. And there was a total expectation on Wall Street that maybe this isn't going to solve the problems, but we've got to get this thing done.

So when it went down, just jaws were on the floor. And that's reflected in how much the market dropped just in the last 15 or 20 minutes of trading, when it went from about down 500 to about down 750.

MARGARET WARNER: And, Krishna, back to you. The thing is that the markets were down even before the vote, and certainly the Asian and European markets have pretty much already closed, and they were down. So does that suggest there's also a deeper lack of confidence even in this proposed solution?

KRISHNA GUHA: Well, I think -- let's put it this way. There are deep, deep concerns about the state of the financial system globally.

I mean, you saw five banks either nationalized or rescued in a government-sponsored takeover today on both sides of the Atlantic, four in Europe, one here in the U.S., with the Wachovia-Citi deal. The global financial system is under enormous stress.

So that was panicking investors even before the news of the vote came through. But as you watched the votes, the tallies start to mount, you could watch the stock market tickers turn south. So there's no question that investors reacted very negatively to what happened in Congress today.

Fundamental differences on opinion

John Shaw
Market News International
This is a fundamental difference on a concept of whether the federal government should be coming in this heavy -- and, as Jeanne said, it's very heavily laden with politics.

MARGARET WARNER: So, John Shaw, back to you. What is it going to take to fix it?

I mean, Paulson was over at the White House today. He was meeting with the president. You heard the Democratic leadership say, "Well, we're happy to work with the White House and the Republicans, but it's kind of up to the White House to take the lead here, and we hope they'll come up with something that Republicans like."

So who moves next and in what direction?

JOHN SHAW: It's hard to imagine how this passes without a lot more Republican votes; I think that's sort of the bottom line.

And it's interesting because this is not really a dispute over even legislative language where sometimes you pull out a provision and you get 10 or 20 votes. This is a fundamental difference on a concept of whether the federal government should be coming in this heavy -- and, as Jeanne said, it's very heavily laden with politics.

So I think there's going to be at least some slight change to the bill so people will -- those who will end up voting for it will have, you know, be able to say that it had changed a little bit.

But clearly they cannot do much to it. It's a very fragile compromise. And they really can't make a lot of big adjustments to it.

MARGARET WARNER: Do you agree, Jeanne, that you don't this is going to trigger a basic rethinking of the whole premise of the bill?

JEANNE CUMMINGS: No, I don't. I agree that, if there's a fix, it's small. I mean, if Nancy Pelosi can apologize to 12 people, maybe she'll do that and try to grab the votes.

But we should note that the White House isn't alone here. The business community, the financial industry, they want this thing done, and they're going to apply pressure on Congress until it gets done.

And this evening, the Chamber of Commerce had activated all of its members. The Business Roundtable was activating all of its members. And they have the greatest influence on the very Republicans who have held out.

And so we will see a stepped-up effort by those communities to try to change this, because there could be other banks that go down tomorrow based on this. I mean, this did not ease the credit crunch that we've been talking about. And how many of those can happen? How many can Congress tolerate?

MARGARET WARNER: Briefly, John, is it case that the House isn't coming back until Thursday now?


Risks caused by the vote

Joe Nocera
New York Times
I mean, let's just be clear here. It is shocking, even with an election this close, that Congress is not willing to exercise some leadership. And it gets broken down into partisan bologna. I'm sorry to say it like that.

MARGARET WARNER: So, Joe Nocera, what happens -- I mean, the markets aren't closed for the next two days. What do you think is going to happen in the meantime?

JOE NOCERA: Well, nothing good. I mean, it's shocking.

I mean, let's just be clear here. It is shocking, even with an election this close, that Congress is not willing to exercise some leadership. And it gets broken down into partisan bologna. I'm sorry to say it like that.

So, you know, people are going to wake up tomorrow and go to work in the markets and worry that there will be another bank failure, that there will be another drop in the stock market, that the credit markets will continue to crater.

I mean, the system just can't take that much more, and that's where we are.

MARGARET WARNER: And, Krishna, though, if you listen to the members -- and they talk about at least the calls and e-mails they're getting -- and maybe it's just because the opponents are more exercised than those who reluctantly support it -- but it doesn't look like tinkering around the edges of this bill is going to change how the public feels about it.

As you said, it will take, really, more of a crunch on the credit markets where people feel it. How far away are we from that, where everyday people really start feeling it?

KRISHNA GUHA: Well, we may not be that far away. I mean, in some respects, we've already felt the credit crunch over the past year, but there's no question that what we're looking at now is a really severe intensification of this credit crunch, if the financial system remains as dysfunctional as it is today.

In terms of how this affects the political calculus, let's see. I mean, we've had a massive drop in the stock market today. And the general public seems to pay more attention to what's happening to stocks, because they understand that better than what's happening in some of these complex credit markets.

So it's possible at least that the scare today could, if you like, bring out a silent majority that doesn't like having to do this one bit, but sees that perhaps it's better than the alternative of not doing anything at all.

MARGARET WARNER: And, Joe, is there no -- there's no real measure of the credit markets, is there, I mean, that you can look at and say, "The Dow was up or down"?

JOE NOCERA: Well, I mean, there are measures, but they're complicated. So one important measure is the widening of credit default swap spreads. And that sounds ridiculously complex, and it is, but the wider the spreads are...


JOE NOCERA: ... between -- how much people are willing to pay for this kind of insurance, the more the market is saying that the firm that they're buying the swaps against is going to default. It's a signal of lack of confidence.

MARGARET WARNER: But how does that affect mom and pop or the voters?

JOE NOCERA: Well, I mean, it affects them because of, you know, how many banks are going to go out of business. And then once the banks go out of business and they won't -- and other banks won't loan money to each other, and then it becomes difficult to get a mortgage. Credit card rates go up.

I mean, it affects daily life. And it already is starting to trickle down to companies. And it affects employment, because if they can't get loans to expand and grow and so on, people lose their jobs.

MARGARET WARNER: So, John, Jim Moran, a congressman from Virginia, said today on the floor, was quoted as saying, you know, maybe the pain is going to just have to get really bad before these votes turn around. Do you think it will take that? Or do you think there's some fix that can be done here?

JOHN SHAW: I think there's -- a possible way to get this moving is to make a slight change and then have the Senate take it up first. I think there's a much stronger vote there, much more bipartisanship.

And actually the Senate Republican leader Mitch McConnell, at a late afternoon press conference, clearly left the door open that the Senate might go first. A strong bipartisan vote might change the dynamic, and kick it over to the House, and get a little bit -- a little bit of momentum there.

MARGARET WARNER: But if the issue, Jeanne, is re-election fears on the part of especially these House members, how do you get around that?

JEANNE CUMMINGS: Well, it is a problem, and you've got it in the Senate, too. And so I talked with some aides to Senator Reid this evening, and they may not go first for that very reason.

Why would a senator risk taking this kind of vote on such an unpopular measure and then have the House just kill it again? So I wouldn't be surprised to see the Senate hold until the House finally does get the job done.

MARGARET WARNER: And, Krishna, tonight, Paulson, Hank Paulson said he and the Fed would be working -- meanwhile continue to work on a case-by-case basis, as they have been, to try to contain the damage, but he said, "Our toolkit is substantial, but insufficient." Is he absolutely right about that?

KRISHNA GUHA: Oh, you bet he is. I mean, look, so far, the government has had to resort to a series of ad hoc fire-fighting measures to desperately try to contain crises at one financial institution after the other.

It's going to have to do some more of that, in all likelihood, but what Paulson is desperate to do is to pivot to a more systematic approach that gets at the underlying causes of this financial stress. He knows that, if he can't, he's going to have to deal with more and more individual failures in the months ahead.

MARGARET WARNER: All right, Krishna Guha, Joe Nocera, Jeanne Cummings, and John Shaw, thank you all.