The Financial Bailout Bill Heads Back to the House

Sarah A. Binder and Mark Spindel
Mark Spindel Chief Investment Officer, Potomac River Capital LLC

October 2, 2008

The Bush administration’s all-out push for a $700 billion bailout for the nation’s beleaguered banks ended in failure this past Monday, as a majority of the U.S. House refused to endorse the proposal. Despite the urging of their leaders, both parties’ rank and file balked when asked to vote for an extremely unpopular bill. Markets reacted swiftly and negatively, as the Dow dropped over 700 points when the vote was gaveled to a close.

Given the intense effort to pass a bailout package, why did the bill fail and what does the defeat tell us about the prospects for passage of a revised package this week? In brief, party leaders called on their members to cast votes for the nation’s financial welfare. Legislators responded by casting votes for their own electoral safety, guided by entrenched ideological commitments. Not surprisingly, a bill that asked House members to risk political suicide or to jettison their ideological commitments was unlikely to succeed in the run up to the November elections.

A quick analysis of the vote crystallizes the forces that defeated the bill in the House. Election watchers identify over fifty contested House seats this season. Those legislators voted overwhelmingly against the bill, calculating that voting for an unpopular bill would be political suicide just weeks before the election. Nor was the bill popular with the “marginal” members of the House, who secured election in 2006 with under sixty percent of the vote. Members most in danger of losing their seats were the most likely to vote against the bill.

Unfortunately for the administration, electoral calculus was bipartisan. Both Democrats and Republicans concluded that there was little upside to supporting the bill. Nor was the Administration able to curry support amongst Republicans running for re-election in safe seats. These Republicans were no more inclined to support the bill than their colleagues at risk of losing their seats. Barely a third of the safe GOP voted aye.

Still, more than electoral calculation mattered. On the left and right, legislators’ ideological commitments shaped votes.

Within the GOP conference, strong conservatives showed little interest in supporting the administration’s bailout plan. The more conservative the Republican, the more likely he voted against the bill. Nearly three quarters of Republican conservatives voted against the bill, joined by more than half of their moderate brethren. Ideological effects are visible even after we take into account the state of play for November. Conservatives running in safe seats were far more likely to vote against the bill than moderates in a similar boat. Conservatives’ antipathy towards a massive government intervention into financial markets undermined leaders’ efforts to cobble a majority for the bailout.

Democrats were equally driven by ideological commitments. The more liberal the House Democrat, the more likely she was to vote against the bill, even among those running in the most competitive seats. Arguing that the package bailed out financial firms while doing little to help homeowners on the verge of foreclosure to stay in their homes, liberal votes against the plan are not surprising. Democrats, after all, saw little in the bill for distressed homeowners. Democrats from states with high subprime foreclosure rates were no more likely than Democrats untouched by the subprime crisis to vote for the bill. That said, representatives from districts with higher median household incomes were more likely to vote in favor of the bill than representatives from less affluent areas—suggest that an area’s degree of exposure to Wall Street may have influenced members’ votes.

In many ways, Monday’s debacle was ultimately a classic ends-against-the-middle vote. Unfortunately, in an era of intense partisanship, few legislators reliably sit in the middle of the spectrum. Add overwhelmingly public opposition right before the elections, and no surprise that leaders were unable to marshal twelve more of their colleagues to line up behind them. As the late Speaker Tip O’Neill would have put it, “all politics is local.” In fact, the only reliable votes this week were the two-dozen or so House members on the verge of retirement. With no electoral impact to calculate, nearly all of the impending retirees bought the leaders’ pitch for the nation’s economic well-being.

Understanding why the vote failed provides some perspective as the House takes up the bill again, amended by the Senate to appeal to House Republicans who are not firmly in the conservative camp. If the bill passes, it is because congressional leaders have adopted a tried-and-true method of passing measures aimed at protecting the general welfare: Grease the skids with targeted benefits to secure the votes of wavering legislators. This time, the Senate has added over $100 billion of tax and related goodies, all with an eye to converting opponents into supporters. At this late stage of the game, it is the only strategy that has a chance of working. Of course, the bill requires the next administration to come back to Congress for authority to spend the second $350 billion dollars. This is hardly the last we’ll hear about the wisdom of the government’s rescue plan for the nation’s financial institutions.