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Emergency Economic Stabilization Act of 2008
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Emergency Economic Stabilization Act of 2008
The Emergency Economic Stabilization Act of 2008, also known as the "bank bailout of 2008" or the "Wall Street bailout", was a United States federal law enacted during the Great Recession, which created federal programs to "bail out" failing financial institutions and banks. The bill was proposed by Treasury Secretary Henry Paulson, passed by the 110th United States Congress, and was signed into law by President George W. Bush. It became law as part of Public Law 110-343 on October 3, 2008. It created the $700 billion Troubled Asset Relief Program (TARP) whose funds would purchase toxic assets from failing banks. The funds were mostly directed to inject capital into banks and other financial institutions as the Treasury continued to review the effectiveness of targeted asset-purchases.
The 2008 financial crisis developed partly due to the subprime mortgage crisis, causing the failure or near-failure of major financial institutions like Lehman Brothers and American International Group. Seeking to prevent the collapse of the financial system, Secretary of the Treasury Paulson called for the U.S. government to purchase several hundred billion dollars in distressed assets from financial institutions. His proposal was initially rejected by Congress, but the bankruptcy of Lehman Brothers and lobbying by President Bush ultimately convinced Congress to enact the proposal as part of Public Law 110-343.
Early estimates for the bailout's risk cost were as much as $700 billion; however, TARP recovered $441.7 billion from $426.4 billion invested, earning a $15.3 billion profit (an annualized rate of return of 0.6%), which may have been a loss when adjusted for inflation.
After the freeing up of world capital markets in the 1970s and the repeal of the Glass–Steagall Act in 1999, banking practices (mostly Greenspan-inspired "self-regulation") and monetized subprime mortgages sold as low risk investments reached a critical stage during September 2008, characterized by severely contracted liquidity in the global credit markets and insolvency threats to investment banks and other institutions. In response, the U.S. government announced a series of comprehensive steps to address the problems, following a series of "one-off" or "case-by-case" decisions to intervene or not, such as the $85 billion liquidity facility for American International Group on September 16, the federal takeover of Fannie Mae and Freddie Mac, and the bankruptcy of Lehman Brothers.
The legislation had its origin in early 2008 when Secretary of the Treasury Henry Paulson directed two of his aides, Neel Kashkari and Phillip Swagel, to write a plan to recapitalize the U.S. financial system in case of total collapse. The plan, which was also presented to Federal Reserve Chairman Ben Bernanke, called for the U.S. government to purchase about $500 billion in distressed assets from financial institutions.
The original proposal was submitted to the United States House of Representatives, with the purpose of purchasing bad assets, reducing uncertainty regarding the worth of the remaining assets, and restoring confidence in the credit markets. The bill was then expanded and put forth as an amendment to H.R. 3997. The amendment was rejected via a vote of the House of Representatives on September 29, 2008, voting 205–228.
Supporters of the plan argued that the market intervention called for by the plan was vital to prevent further erosion of confidence in the U.S. credit markets and that failure to act could lead to an economic depression. Opponents objected to the plan's cost and rapidity, pointing to polls that showed little support among the public for "bailing out" Wall Street investment banks, claimed that better alternatives were not considered, and claimed that the Senate forced passage of the unpopular version through the opposing house by "sweetening" the bailout package.
On October 1, 2008, the Senate debated and voted on an amendment to H.R. 1424, which substituted a newly revised version of the Emergency Economic Stabilization Act of 2008 for the language of H.R. 1424. The Senate accepted the amendment and passed the entire amended bill, voting 74–25. Additional unrelated provisions added an estimated $150 billion to the cost of the package and increased the length of the bill to 451 pages. (See Public Law 110-343 for details on the added provisions.) The amended version of H.R. 1424 was sent to the House for consideration, and on October 3, the House voted 263–171 to enact the bill into law. President George W. Bush signed the bill into law within hours of its congressional enactment, creating the $700 billion Troubled Asset Relief Program (TARP) to purchase failing bank assets.
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Emergency Economic Stabilization Act of 2008
The Emergency Economic Stabilization Act of 2008, also known as the "bank bailout of 2008" or the "Wall Street bailout", was a United States federal law enacted during the Great Recession, which created federal programs to "bail out" failing financial institutions and banks. The bill was proposed by Treasury Secretary Henry Paulson, passed by the 110th United States Congress, and was signed into law by President George W. Bush. It became law as part of Public Law 110-343 on October 3, 2008. It created the $700 billion Troubled Asset Relief Program (TARP) whose funds would purchase toxic assets from failing banks. The funds were mostly directed to inject capital into banks and other financial institutions as the Treasury continued to review the effectiveness of targeted asset-purchases.
The 2008 financial crisis developed partly due to the subprime mortgage crisis, causing the failure or near-failure of major financial institutions like Lehman Brothers and American International Group. Seeking to prevent the collapse of the financial system, Secretary of the Treasury Paulson called for the U.S. government to purchase several hundred billion dollars in distressed assets from financial institutions. His proposal was initially rejected by Congress, but the bankruptcy of Lehman Brothers and lobbying by President Bush ultimately convinced Congress to enact the proposal as part of Public Law 110-343.
Early estimates for the bailout's risk cost were as much as $700 billion; however, TARP recovered $441.7 billion from $426.4 billion invested, earning a $15.3 billion profit (an annualized rate of return of 0.6%), which may have been a loss when adjusted for inflation.
After the freeing up of world capital markets in the 1970s and the repeal of the Glass–Steagall Act in 1999, banking practices (mostly Greenspan-inspired "self-regulation") and monetized subprime mortgages sold as low risk investments reached a critical stage during September 2008, characterized by severely contracted liquidity in the global credit markets and insolvency threats to investment banks and other institutions. In response, the U.S. government announced a series of comprehensive steps to address the problems, following a series of "one-off" or "case-by-case" decisions to intervene or not, such as the $85 billion liquidity facility for American International Group on September 16, the federal takeover of Fannie Mae and Freddie Mac, and the bankruptcy of Lehman Brothers.
The legislation had its origin in early 2008 when Secretary of the Treasury Henry Paulson directed two of his aides, Neel Kashkari and Phillip Swagel, to write a plan to recapitalize the U.S. financial system in case of total collapse. The plan, which was also presented to Federal Reserve Chairman Ben Bernanke, called for the U.S. government to purchase about $500 billion in distressed assets from financial institutions.
The original proposal was submitted to the United States House of Representatives, with the purpose of purchasing bad assets, reducing uncertainty regarding the worth of the remaining assets, and restoring confidence in the credit markets. The bill was then expanded and put forth as an amendment to H.R. 3997. The amendment was rejected via a vote of the House of Representatives on September 29, 2008, voting 205–228.
Supporters of the plan argued that the market intervention called for by the plan was vital to prevent further erosion of confidence in the U.S. credit markets and that failure to act could lead to an economic depression. Opponents objected to the plan's cost and rapidity, pointing to polls that showed little support among the public for "bailing out" Wall Street investment banks, claimed that better alternatives were not considered, and claimed that the Senate forced passage of the unpopular version through the opposing house by "sweetening" the bailout package.
On October 1, 2008, the Senate debated and voted on an amendment to H.R. 1424, which substituted a newly revised version of the Emergency Economic Stabilization Act of 2008 for the language of H.R. 1424. The Senate accepted the amendment and passed the entire amended bill, voting 74–25. Additional unrelated provisions added an estimated $150 billion to the cost of the package and increased the length of the bill to 451 pages. (See Public Law 110-343 for details on the added provisions.) The amended version of H.R. 1424 was sent to the House for consideration, and on October 3, the House voted 263–171 to enact the bill into law. President George W. Bush signed the bill into law within hours of its congressional enactment, creating the $700 billion Troubled Asset Relief Program (TARP) to purchase failing bank assets.