What the Bailout-Bill Crisis Has Wrought

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Pablo Martinez Monsivais / AP

Speaker of the House Nancy Pelosi, D-Calif., signs the financial-rescue package on Capitol Hill that will be sent to the White House for President Bush to approve Friday, Oct. 3, in Washington

Two weeks late and some trillion dollars in lost market equity short, the House Friday finally passed $700 billion legislation to bail out struggling Wall Street firms and ease the crisis of credit and confidence gripping the U.S. economy. And while its impact on the ailing economy is far from clear, the crisis' effect on the presidential campaign has been unmistakable.

The bill passed the House 263 to 171 — with 91 Republicans and 172 Dems voting yes — a larger margin than expected, considering the bill's spectacular failure, 228 to 205, on Monday that caused the largest one-day drop, 778 points, in the Dow Jones industrial average. Very soon after passage, President Bush signed the bill into law, finally giving Treasury Secretary Hank Paulson the authority that he requested more than two weeks ago to buy up Wall Street's distressed mortgage-backed securities. But getting it done was not pretty or easy, and the clearest sign of that was in the sheer size of the legislation itself; Paulson's original request was barely three pages long, whereas the bill passed today runs well over 400 pages.

So what made the difference to the 26 Republicans and 33 Democrats who changed their minds? For starters, the business community, which apparently assumed the bill would pass easily the first time around, waged a fierce lobbying campaign to drive the point home that the crisis was not limited to Wall Street. Lobbyists underlined to every member of Congress that small businesses and consumers were already having serious trouble getting loans and that the entire economy could completely freeze up if nothing was done. Representatives surely heard the same message directly when they went home to their districts after Monday's debacle, as many of the same constituents who had been so angry about a bailout voiced their frustration at the real hit taken by their stock portfolios, mutual funds and 401(k)s.

That, however, wasn't sufficient on its own to change enough minds. Ever mindful of what makes Congress run, the Senate, taking the lead, passed the second bill 74 to 25, with a few crucial add-ons to sweeten the pot for Republicans: extensions of popular tax benefits for business R&D and alternative energy, relief for the growing pool of people subject to the alternative minimum tax, disaster assistance for states affected by Midwestern floods and Hurricane Ike, and a provision raising the Federal Deposit Insurance Corporation's ceiling of guaranteed deposits to $250,000. And the initial no vote gave many members facing unhappy constituents so close to an election cover to vote for the second bill. "In this game, part of the way of winning is losing to get there," says Bruce Josten, a vice president at the U.S. Chamber of Commerce, which represents 3 million U.S. businesses.

Coming after two weeks that have only further dimmed Americans' view of Congress, the successful vote was a cause more for relief than for celebration. Legislators can only hope that voters will soon forget the unprecedented financial and political crisis, in which a lame-duck Administration desperate to get an emergency package passed had barely any sway with a Congress seemingly paralyzed by fear of the impending elections. There was that White House meeting a week ago, which some thought would be a photo op with presidential candidates Barack Obama and John McCain to announce a bipartisan deal, but which turned ugly as House Republican leaders balked at an arrangement worked out with the Administration and Senate Republicans. The bill was renegotiated over the weekend, expanding Congress's oversight of how the money would be spent, putting some limits on executive compensation and removing some Democratic priorities that angered Republicans, such as funding for a controversial housing-advocacy group and a provision to help homeowners in bankruptcy.

Even then, though, the changes were not enough to persuade House GOP members — only 37% of whom voted for the measure, compared with 60% of Democrats — and the bill failed, sending the stock market into a tailspin. "The calls to our office before that vote were universal nos," says Representative Michael Conaway, a Texas Republican, one of 26 Republicans who switched his vote. "After the vote, I started getting calls from constituents saying, 'Oh my God, that was the wrong vote; I thought you were voting yes' — particularly from small businesses and people who lost a lot in retirement savings."

While the bill is intended to help fix, or at least calm, the ailing economy, perhaps the most immediate impact has been on the presidential campaign. Since Paulson made his request on Sept. 18, McCain has lost the 3-point lead in national polls — his first in the general election — which he'd built on the back of his successful convention and pick of Sarah Palin as his running mate. He now trails Obama by 6 percentage points, according to an average of national polls by the nonpartisan website RealClearPolitics, and the focus of the campaign has shifted from character and even national security to little else but the economy.

McCain's mishandling of the situation in Washington has only exacerbated his woes. Watching the polls start to slip away from him, last week he abruptly announced he was suspending his campaign in order to return to Washington to deal with the crisis — even briefly threatening to skip the first presidential debate unless the gridlock was resolved. He backed up House minority leader John Boehner when he balked at the first bill and pledged to help convince unhappy House Republicans — a pledge that clearly fell short when the vote failed. It didn't help McCain's standing that he initially insisted that any final deal contain no earmarks, only to reluctantly vote for a package that was stuffed with pork in order to win enough support.

Obama, who mostly stayed away from the negotiations and argued that the injection of presidential politics would only complicate the process, worked the phones in the final days to help push 33 Democrats into changing their votes to ease final passage. While Democrats praised Obama for getting more members to come on board, Republicans — who only last week had credited McCain with at least bringing House Republicans to the bargaining table — had little good to say about their candidate. Obama was praised nine times in the Democratic press conference following the vote; McCain was not once mentioned in the GOP press conference before the vote. Having been burned by his participation last week, the Republican largely stayed away. "They told me [McCain] was going to call me," says Representative Sue Myrick, a North Carolina Republican who switched her vote. "He didn't."

No matter who is elected President, the crisis ensures that the next Administration will have to make some tough choices next year about its campaign promises about taxes and spending. It also ensures that the economy will remain the top issue for the foreseeable future as Congress investigates what led to the mess and looks into tightening regulations to prevent a similar collapse. "Whatever we do today will start a process that will hopefully get us where we need to be in the not too distant future," says Representative Jim Clyburn of South Carolina, the No. 3 House Democrat. Members and candidates are now free to get back to the campaign trail for the final month before Election Day, but they are all mindful of the cost, both political and economic, of the crisis.

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(See pictures of the global financial crisis here.)