WASHINGTON - The House yesterday rejected the Bush administration's $700 billion bailout package by a vote 228 to 205, stunning proponents of the measure and triggering huge losses in the markets after the Treasury earlier in the day detailed and opened its $50 billion temporary federal guaranty program for money market funds.
The Treasury program, which was announced Sept. 19, is designed to prevent runs on money market mutual funds as investors seek greater safety amid the credit and liquidity crisis gripping financial markets.
Lawmakers turned down the $700 billion bailout measure yesterday after a weekend of frenzied negotiations that Democratic and Republican leaders said had yielded a bipartisan compromise. Democrats voted 140 in favor of the bill and 95 against it, while just 65 Republicans supported the bill and 133 opposed it, many warning it was not a free market solution.
The Dow Jones industrial average dropped nearly 778 points, or 6.98% to 10,365, its largest one-day point drop ever. Meanwhile, the Standard & Poor's 500 index fell 106.85, or 8.81%, to 1,106.42.
Asked by reporters if the banking system could withstand the continuing stress, a noticeably frazzled Treasury Secretary Henry Paulson did not directly answer the question, saying only that it had withstood the strain so far. He pledged to work with lawmakers on a legislative compromise.
House Speaker Nancy Pelosi, D-Calif., said she was surprised by the defeat in light of the additions made to the bill over the weekend that provided the government with equity in the financial firms from which it purchases troubled securities, as well as limits on the firms' executives' compensation and multiple levels of oversight over the Treasury department's purchasing program, among other things.
She said Democrats will continue to negotiate with Republicans to craft a bill that can be approved by Congress. No action was expected again in the House until after the two-day Rosh Hashanah Jewish new year, which started yesterday at sundown and ends Wednesday evening.
Republican leaders blamed the bill's defeat on a partisan speech on the House floor by Pelosi, in which she attributed the need for the bailout to eight years of "failed economic policy" by the Bush administration.
Republican minority whip Roy Blunt of Missouri, who supported the measure along with the rest of the Republican leadership, suggested that Pelosi's speech had cost the Democrats the support of 12 Republican lawmakers.
But House Financial Services chairman Barney Frank, D-Mass., said he was "appalled" at the suggestion that even though there's a "terrible crisis affecting the American economy ... because somebody hurt [Republican members'] feelings, they decided to hurt the country" and voted against the measure.
"Frankly that's an accusation against my Republican colleagues I would have never thought of making," he said. "I would not have imputed that degree of pettiness and hypersensitivity."
He said Democratic lawmakers were hoping to work with Republicans in the coming days.
Broker-dealer groups said they were disappointed that the bill did not clear Congress.
"We think the proposal would have helped move some of the freeze in the credit markets," said Michael Decker, co-chief executive officer of the Regional Bond Dealers Association. "We're hopeful that Congress will continue to focus on the issue and come up with a compromise that's appealing to a majority of representatives."
If Treasury is allowed to purchase troubled securities from financial firms, the RBDA hopes the department will focus on areas of the municipal market that have "locked up," particularly student loan-backed auction rates that continue to experience "acute illiquidity," Decker said.
Tim Ryan, president and chief executive officer of the Securities Industry and Financial Markets Association, said the legislation "could have provided a bulwark of stability against continuing tough economic times."
"Without this package, Treasury and the Fed will have to fall back on the one-off solutions they utilized over the last few months, which will be exhausting, more expensive, and less effective," he said in a statement.
Meanwhile, the Treasury's temporary guarantee program opened yesterday to all money market funds that are registered with the Securities and Exchange Commission. For money market funds willing to pay the fees to participate, the program provides coverage to shareholders for amounts they had in a fund as of the close of business on Sept. 19 if the fund's net asset value falls below $0.995 or breaks the buck. The program will be available for three months and could possibly be extended up to a year after Treasury review.
Peter Crane, president and CEO of Crane Data LLC, said that if a fund signs up for the program it must notify the Treasury if it breaks the $0.995 threshold. If a fund cannot receive a cash injection from its parent company and requests insurance protection, the fund will be forced to close and liquidate assets. The Treasury would pay the difference up to $1.00 of NAV ensuring investments are returned at par value, Crane said.
The program requires funds to pay fees for the insurance protection, and the plan splits funds into two tiers based on their NAV. Funds that are closer to breaking the buck will pay a higher fee.
Funds with a NAV per share greater than or equal to $0.9975 as of the close of business on Sept. 19, will pay a fee of 0.01%, or 1 basis point, of the fund's total assets. Funds with a NAV per share of greater than or equal to $0.995 and below $0.9975 as of that date will pay 1.5 basis points based on the funds total assets.
"One basis point is dirt cheap," Crane said, adding that he expects all money market funds will participate in the program. "Some don't need it, but they will buy it just to get rid of the questions."
A money market fund with $31.3 billion in total assets as of Sept. 19 would pay $3.1 million for three months of insurance if its NAV is above $0.9975. Sources said they expect the fees will be netted out of a fund's yield.
"It's a way of life right now," said Mary Jo Ochson, chief investment officer for municipal markets and bonds with Federated Investors Inc. in Pittsburgh. "I think investors need to hear about the guarantee program. I'm hoping that will help stabilize the market," she said.
"We welcome the Treasury Department's announcement this morning about the guarantee program for money market mutual funds, and commend Secretary Paulson for his strong leadership," Paul Schott Stevens, president and CEO of the Investment Company Institute, said in a statement. "This temporary program, implemented to address unprecedented market conditions, will help sustain investor confidence in money funds."
Investors in the Reserve Primary Fund, which broke the buck on Sept. 16, are not entitled to the insurance program, Crane said.
Investors began to flee relatively secure money market funds after Reserve Primary Fund fell below $1.00 to 97 cents. The fund, which had $62 billion in taxable assets as of June 30, was forced to write down debt from Lehman Brothers Holdings Inc.
The news of the Reserve Primary Fund's troubles spurred fears of a run on money-market funds. The Putnam Prime Money Market Fund halted investor redemptions a day later. Investors withdrew about 5%, or $188 billion, of the total $3.4 trillion in money market assets between Sept. 3 and Sept. 24, according to data compiled by the ICI.
As investors sought security, funds invested in Treasury securities "are just raking it in," said Connie Bugbee, managing director of iMoneyNet in Westborough, Mass. Assets in governmental funds increased about 15 % between Sept. 18 and Sept. 26, according to data from iMoneyNet.
Municipal money market funds have experienced less of an exodus, but investors are still withdrawing. Bugbee said that for the week ending Sept. 23, municipal money market funds saw $29 billion of outflows - twice as much as the previous one-week outflow high. Yields in money market funds have become so attractive that some taxable funds are investing in them, she said.
According to Morningstar Inc., there were 279 tax-free money market funds that hold $553 billion of assets as of mid-September.