JIM LEHRER: NewsHour congressional correspondent Kwame Holman begins our coverage of the second run toward a financial rescue bill.
SEN. HILLARY CLINTON (D), New York: This is a sink-or-swim moment for our country, and we cannot merely catch our breath. We must swim for the shores.
KWAME HOLMAN: Senators pleaded for passage of the latest version of the financial rescue plan this afternoon ahead of tonight’s vote that brought in Senators Biden, McCain, and Obama from the campaign trail.
Tonight’s expected Senate approval follows the bailout bill’s stunning defeat in the House on Monday. That led to slight revisions to the package and the decision to have the Senate vote first.
Republican Leader Mitch McConnell.
SEN. MITCH MCCONNELL (R-KY), Senate Minority Leader: I’m optimistic that we’re going to have a significant bipartisan victory on the rescue plan here in the Senate tonight.
I think it’s important to remember this is about Main Street and not Wall Street. It’s about unlocking the frozen credit markets and getting America’s economy moving again.
KWAME HOLMAN: Majority Leader Harry Reid.
SEN. HARRY REID (D-NV), Senate Majority Leader: I would not have moved forward on this if I didn’t think the chance in the House was good.
Now, I don’t — I don’t run the House. I have nothing to do with the House other than answer questions from the leadership. That’s a decision that the Democratic and Republican leaders over there will have to make a decision.
But this is good legislation. And I hope that no one thinks I’m trying to jam anyone. This is an effort to solve what I think is the greatest financial crisis we’ve had since the Great Depression.
KWAME HOLMAN: The modified bill still centers on authorizing the Treasury Department to use up to $700 billion to buy up bad mortgage-backed securities.
In addition, it would increase federal insurance on bank deposits from $100,000 to $250,000. The guaranteeing agency, the Federal Deposit Insurance Corporation, also would be allowed temporarily to borrow unlimited funds from the U.S. Treasury.
SEN. HARRY REID: That’s what this raising FDIC is all about, so small community banks don’t have to be afraid of people taking their deposits out and taking them to the big city.
KWAME HOLMAN: Unlike the original bill, the Senate version has other provisions unrelated to the financial crisis. It would prevent 20 million Americans from being hit by the alternative minimum tax next year and extend a series of energy and other tax breaks for businesses.
Since Monday’s failed vote in the House, lawmakers have gotten feedback about the urgency to pass something that will unlock frozen credit markets. Tennessee Republican Lamar Alexander.
SEN. LAMAR ALEXANDER (R), Tennessee: The Nashville Tennessean reports today that the largest General Motors car dealer just south of Nashville turned down a third of the people who came in to buy a car for their auto loans.
The New York Times reports today that, across the country, the number is about 63 percent — the number is 63 percent of people who can get the loan, when normally it’s 83 percent.
What is happening is not directed at the stock market; it’s directed at the credit market. What we have is, as most of us have said, a big wreck in the middle of the economic highway, and it’s clogging up our payroll check, our auto loan check, our money for our mortgage loan or for our farm credit loan, and it can’t get through the wreck, and the economic traffic can’t be moving.
KWAME HOLMAN: When the House takes up the revised bill tomorrow or Friday, it will need 12 more votes than the first bill got.
One of them will not come from Democrat Peter DeFazio of Oregon, who says revising the plan doesn’t fix its core problem: allowing Treasury Secretary Paulson to purchase a range of questionable assets.
REP. PETER DEFAZIO (D), Oregon: It’s the original Paulson program with bells and whistles. He can buy any sort of asset he determines. That could be credit card debt. It could be auto loans. He says he wants to do that.
It could be personal debt. It might be pawn shop certificates, maybe office buildings, anything he wants, at any price he wants, under any conditions he wants, but he’ll have to tell us after he’s done it. This is unbelievable power to give to this guy. He will be God on Wall Street.
KWAME HOLMAN: Connecticut Republican Christopher Shays admits not all of the bill’s critics have been satisfied, but says members must vote “yes” this time, as he did on Monday.
REP. CHRISTOPHER SHAYS (R), Connecticut: We haven’t done a good job of articulating. The challenge we have is, if we vote for this bill, things may not go really well. They may continue to decline a bit. But had we not voted for it, we might have had a disaster that they will never have known about.
I think this bill will pass the Senate. I think it will pass the House. And I think it will pass because we’re having some people act like grownups, and not panic, and realize that we don’t have to throw everything out and start fresh.
KWAME HOLMAN: Both presidential candidates were expected to cast Senate votes tonight on the rescue bill, beginning the process leaders promise will end this time in certain congressional approval.
Mixed Views in the Senate
JIM LEHRER: Margaret Warner has more.
MARGARET WARNER: For a closer look at where things stand tonight on the rescue plan and the financial impact of this crisis here and abroad, we get four views.
Susan Ferrechio is chief congressional correspondent for the Washington Examiner and San Francisco Examiner.
Norm Ornstein is an observer of Congress and resident scholar at the American Enterprise Institute. He joins us from New York this evening.
David Leonhardt is an economic columnist for the New York Times.
And Simon Johnson was chief economist at the International Monetary Fund until this past August. He's now a professor at the MIT Sloan School of Management and a senior fellow at the Peterson Institute for International Economics.
And welcome to you all.
Susan, beginning with you, are Senate leaders this confident? And if so, what is it based on, about the vote tonight?
SUSAN FERRECHIO, Washington Examiner: Well, the Senate initially was more accepting of this bill than the House. And now that they've added some incentives to it, I think they feel the passage is pretty much assured by a healthy margin in the Senate.
And then they're hoping that that will boost confidence in House members to also vote for the bill, but they don't really know exactly what will happen in the House vote.
MARGARET WARNER: But what are the vote-getters for them in the things that they added to the bill?
SUSAN FERRECHIO: Well, they've got the attractive alternative minimum tax suspension in there that will prevent 20 million taxpayers from being caught up in the AMT. That's something that they passed last week.
MARGARET WARNER: The alternative minimum tax.
SUSAN FERRECHIO: Correct. And they really want that to pass. They've also got some tax breaks for folks who are using alternative energy initiatives for companies and private citizens. That's very attractive to the Senate, as well.
MARGARET WARNER: And the changes to the FDIC, in terms of how much it can insure, and then the FDIC can go out and borrow more, is that right...
SUSAN FERRECHIO: Right, that's critical.
MARGARET WARNER: ... to be able to cover that insurance?
SUSAN FERRECHIO: This will protect banks from just falling apart from jittery account-holders making a run and withdrawing all their money. Many, many senators and House members were demanding this, so this is definitely a critical point, gives them an extra $250,000, instead of the $100,000.
And that will certainly help particularly small banks that would not be able to sustain that kind of craziness, with people coming to take their money out, out of fear that the bank will collapse.
MARGARET WARNER: Norm Ornstein, what explains the difference in the reception that this bill, this concept, this Paulson concept, which has remained pretty much intact, has received in the House versus the Senate?
NORMAN ORNSTEIN, American Enterprise Institute: Well, Margaret, I wouldn't be one to say that the Senate lacks its dysfunction, but on this issue it has been more functional.
You know, first, we have a different interpersonal relationship among senators. The leaders actually have a better opportunity to be leaders. They've had substantive leaders, including conservatives like Judd Gregg of New Hampshire and Bob Bennett of Utah, who have decided to work with their Democratic counterparts and have pretty good relationships with them.
Keep in mind that two-thirds of the Senate are not up for election this time, so they don't have those immediate electoral pressures. In the House, almost all the members in tight districts, where they face challenges, ended up voting against this particular package. So that's certainly another element of it.
And then one final thing. The Senate has a center. You know, if we look at people like Gregg or Bennett, they're conservative in their voting records, but they're basically center-right.
The House of Representatives has pretty much lost that center. And this was a coalition of people strongly on the right with people strongly on the left who brought it down in the House. That's just not quite as big a problem in the Senate.
The credit crunch's ripple effect
MARGARET WARNER: Now, Chris Dodd, the chairman of the Banking Committee, had promised in the beginning this would not be a Christmas tree, but, in fact, this Senate version has a lot of ornaments.
How much are those a factor in the Senate's apparent interest in this bill versus, say, they were put there to help it in the House?
NORMAN ORNSTEIN: Look, the Senate was going to pass this I think by a reasonably healthy margin, not unanimously, but probably a majority of both parties, even without these sweeteners, but now they've really gotten to a rather ridiculous point.
We have over $100 billion. This is for one year in additional expenditures or tax breaks, from the alternative minimum tax, through aid to schools in rural areas, to mental health parity now, which has been added on to this bill, along with energy tax breaks, as well, and none of it is paid for.
And this is going to create a problem in the House now. It will get more votes in the Senate. But half the Blue Dog Democrats who are fiscal hawks, who are the centrists, voted for this package the first time around. They believe strongly in pay-as-you-go budgeting, and this is a very big and bitter pill for them to swallow.
MARGARET WARNER: David Leonhardt, today on the Senate floor, when members -- senators stood up to speak, they did talk about the stock market decline, 777 points on Monday, but they really talked about how the tightening credit is affecting their constituents, both individuals and companies.
You wrote today that you think that's where the focus really belongs, not on the stock market?
DAVID LEONHARDT, New York Times: That's right. And it's hard to keep the focus there, because we all know where we can look up the value of the S&P 500 or the value of the Dow. It's much harder to look up these credit indicators. They're out there, but they're harder to look up.
And I think that combined with the fact that most people and most businesses don't go out and try to get a major loan every week has made this seem a little ephemeral. And it's hard for people to grasp, because they haven't yet come in contact with it themselves and because they don't see the bright, red, flashing lights of the credit markets that they would if this were about the stock market.
MARGARET WARNER: Now, your column today, which is most interesting, you tried to connect the dots about how a credit crisis unfolds, how something like slightly tighter credit that we've seen the last few months, really, can lead to a depression.
Give us a truncated version of that. Connect those dots.
DAVID LEONHARDT: Absolutely. And let me start just by saying, most people think the odds of a depression that looked like what we had in the '30s are very, very small, but the odds of something bad have gotten a lot bigger.
And it in many ways comes down to trust. And banks rely enormously on short-term loans to each other. And what you've seen happen, first about 13 months ago, and then really dramatically in the last few weeks, is the interest rates on those short-term loans between banks have really gone up.
And so the cost for banks of getting money has gone up a lot. And that has ripple effect. That ripples all the way out into mortgages. It ripples out into businesses.
MARGARET WARNER: Because they have to pass this on to their customers.
DAVID LEONHARDT: They have to pass this on. That's precisely right. And as the result, what you see is that you see, first of all, in the financial sector, you see it much more difficult for banks to get money.
And when it's more difficult for them to get money, they worry that they won't be able to get it in the future. And that, in turn, makes them less willing to lend to other banks.
And you really get a sort of contagion. And once you have credit markets that aren't functioning, you really can't have an economy that's functioning for very long.
MARGARET WARNER: OK, but then connect that dot to why only 63 percent of people who go in for auto loans now are getting it. In other words, does it also mean it's harder for the individual?
DAVID LEONHARDT: It will eventually, certainly. I mean, if we don't get the credit markets unlocked, there's no question that people will find in some cases they can't get loans, like the would-be auto borrowers you're talking about.
And in some cases, they're just going to have to pay a lot more. And so that's going to change the calculations for individuals and businesses about when they're willing to buy things and invest in things.
'Crumbling' European banks
MARGARET WARNER: Now, Simon Johnson, meanwhile, this week we've been reading a lot about what's going on in Europe, several major financial institutions either taken over or given major infusions of capital and help from various European governments. How serious is the problem there?
SIMON JOHNSON, MIT Sloan School of Management: It's a very serious problem. It's a global problem now. All the things Dave was talking about are becoming apparent in Europe but much faster than the United States.
In the United States, at least we've had a few weeks to get used to it. The Europeans feel that the banking system is crumbling before their eyes.
We lost a major Belgian Dutch bank on Monday. The Irish banks came under tremendous pressure yesterday. It's an Italian bank today. And the U.K. banks, I'm afraid, have many problems. I'm not even going to start on Spain and Germany.
MARGARET WARNER: And how much of this is contagion from the U.S. versus their own homegrown mortgage problems?
SIMON JOHNSON: That is the question everyone -- everyone asked me exactly that question. And the European perspective is, it's all the Americans' problem. There's a lot of finger-wagging going on over there.
But, unfortunately, a lot of it is their own problems. Partly they didn't regulate their own banks' participation in the United States. So U.S. mortgage problem comes back to Europe because of -- well, they decided to buy it. No one made them buy it.
MARGARET WARNER: In other words, they bought these products that Wall Street was selling?
SIMON JOHNSON: They brought the most esoteric, strange, and it turns out toxic products, yes, those were bought by European banks. They also have their own mortgage problems, clearly in the U.K., in Ireland, and in Spain.
Other countries debatable. I think Italy is a little bit teetering on the brink. And don't, please, mention to the French government the neighbor in their real estate market if you want to visit France again.
MARGARET WARNER: Down in southern France, yes, vacation homes. So how have the European governments responded, if you compared it to the U.S.? Is it the same M.O. or different?
SIMON JOHNSON: It's very different. It's quite interesting. You think you have chaos and disarray? To me, comparing with Europe, it seems that the U.S. has a very orderly process moving towards some sort of conclusion this week.
For example, today in Europe, the French came up with a plan, 300 billion euros, let's do a big European-wide bailout plan. Now, it's interesting. It might have potential. We don't know enough about the details. This sort of leaked out.
The Germans said, "No," and they said it very clearly, and they said it very publicly. And some think that was an easy conversation.
Now there obviously -- this is ongoing discussions back and forth, back and forth. One day one of these banks is going to go that's operating in five different countries. Four guys are in; one guy isn't. What do they do?
Pressures on the credit market
MARGARET WARNER: So, Susan, back to -- if it passes the Senate tonight, what are the prospects in the House, based on your reporting? And when will they take it up? Why is there even this confusion about whether it's Thursday or Friday?
SUSAN FERRECHIO: They'll probably take it up Friday. You've got 435 members that are facing re-election in one month. It's a real volatile situation.
You're not going to be able to know right off the bat tomorrow when they come back to session whether or not they've got the votes together. You're not going to see something happen like you did on Monday, where they bring a bill to the floor and it fails and the stock market drops 700 points. They are not going to bring that to the floor unless it's going to pass.
At this point, some members are -- you know, they need 12 votes. It sounds easy, you know, put these tax breaks on. "Hey, we can find 12 people." It's not that easy.
A lot of members I talk to say they are still opposed to it for the very basic premise that they don't want the government buying up $700 billion worth of bad assets. They've got to feel it out first.
MARGARET WARNER: Norm, after the failure of the vote on Monday and the markets went south, there was a lot of commentary about the failure of leadership in Washington. Not to lead you to one conclusion, but what do you think is at stake tonight in the Senate actually passing this?
NORMAN ORNSTEIN: Well, I think, you know, if we do not get a package done, then I think we're going to see not just a stock market problem, but we will see that credit crunch hit.
And they're going to have to come back and do something more, but it will be an indictment of leadership from the White House through the Treasury Department through all of the congressional leaders.
I think that's why we're going to see this package pass the Senate handily. But as Susan said, it is still no sure thing in the Senate.
MARGARET WARNER: In the House, you mean?
NORMAN ORNSTEIN: It's much more likely -- much more likely, in part, because the public, which said -- many voters said, "We don't want this," when it failed, said, "What's wrong with you? Get it done."
But, you know, it's just 12 votes, Margaret. It's the 25 Blue Dogs that they might lose. They may need 30-plus votes. And that's going to be a little harder.
And they've got more chance of getting from the Republicans, and the Democrats are going to resent the fact that this is being shoved down their throats. So it's a major, major issue for Democratic leaders and Republican leaders in the House.
MARGARET WARNER: And, David, in your bailiwick, just imagine the scenario tomorrow if the Senate bill didn't pass versus if it did, in terms of assessing the stakes?
DAVID LEONHARDT: I think we would highly likely see a significant drop in the stock market. I think one of the reasons why we should look at the credit markets isn't just that they're more important here, but they're a little bit less volatile than the stock markets.
MARGARET WARNER: They don't react day to day?
DAVID LEONHARDT: They don't react day to day quite the way the stock markets do. They have somewhat over the past few weeks because of the incredible situation that we're in, but it's not quite as volatile.
And so I would really encourage people to look at something called the TED spread.
MARGARET WARNER: The TED spread?
DAVID LEONHARDT: It's a lot harder to look up, but the TED spread is basically the difference between the government interest rate and the interest rate that banks charge each other. And it used to be almost zero, the difference, and it's shot up to about 3 percentage points.
And so you want to look at that and see, where does the TED spread go? And it really should fall well below one to give us the sense that we're getting out of the woods.
MARGARET WARNER: And, Simon, how closely is, say, tonight's vote in the Senate being watched in Europe? What impact would a vote one way or the other have?
SIMON JOHNSON: Well, I think the vote in the Senate and the House are obviously being watched very closely. I'm not sure it's quite as important as people may think it is at a technical level.
So the Fed and the Treasury have a lot of powers to do, to buy things, and buy them at prices that they, you know, of their choosing, so at the technical level, I think, the markets understand that, you know, things are more or less under control irrespective of the vote.
I think it's the point -- the point about critical leadership is the key. And the point also about the credit market, you know, the credit market is under pressure.
Even if you pass this vote, even if the Fed and the Treasury come out swinging, let's say, Monday morning and buy $100 billion worth of stuff, does that really relieve the deeper, underlying problems in the credit market? I'm not sure it does.
I think it stabilizes the situation. I'd like us to get to November, first, and get through the election, and then figure out deeper solutions, so that a vote would be seen, I think by everyone, as a positive step, but a pretty small step at this time in the right direction.
MARGARET WARNER: And in terms of actual impact overseas?
SIMON JOHNSON: Well, confidence is key. And confidence is very precarious all around the world right now.
We had a run on an Indian bank yesterday, a very good Indian bank, I would say, to anyone listening and investing. And there's a lot of nervousness.
So it really depends, how does it play out? What's the body language? What are people -- you know, and that was the Monday -- that was the shock on Monday, was the way it happened. And that's a global issue. This is a global crisis.
People are watching globally. And small shocks in one part of the world can have big ramifications elsewhere.
MARGARET WARNER: Well, we'll be watching. Thank you, all four, very much.