Did Yesterday’s Market Rally Kill Paulson’s Rescue Plan?

While yesterday’s market rebound may have helped settle the nerves of jittery investors, it may also have sounded the death knoll for a revised Troubled Asset Relief Act (TARA). On Monday, the House of Representatives voted down Henry Paulson’s banking relief plan by a vote of 228-205, defeating the bill by just thirteen votes.

Voting was not restricted along party lines with forty percent of Democrats voting nay, but what is even more revealing is that President Bush – a vocal supporter of the bill – could not persuade his own party to support the act as more than two-thirds of Republicans remained opposed. In total, 65 Republicans and 140 Democrats voted for the bill’s approval, while 133 Republicans and 65 Democrats voted against the bill. Naturally, this led to a nationally-televised blame-fest with each side frantically spinning the vote results to deflect any criticism in the face of a looming election.

There is little doubt that the upcoming election had as much to do with the vote as the bill itself. As the details of Paulson’s plan became public, a growing public backlash bubbled to the surface – some saw the rescue plan as a bail-out to fat-cat banking executives who made fortunes while devastating the economy, while others saw it as a prudent fiscal plan designed to deal with extraordinary circumstances. The actual truth probably lies somewhere near the middle, but it matters little to the average citizen as they watch their savings evaporate – they simply want someone to do something and to do it now!

Reaction in the markets to the bill’s defeat was immediate and crystal clear – the Dow plunged 777 points for a loss of nearly 7%, while the Toronto Stock Exchange shed 800 points for a 6% loss. Overseas, the reaction was much the same with the London Stock Exchange’s FT-100 index losing nearly 5%. As evening descended on Monday, September 29th, the world was a much poorer place as hundreds of billions of dollars simply vanished in a matter of a few hours.

But just as Scarlet O’Hara famously opined – and she knew a thing or two about Tara (the home not the rescue plan) – tomorrow is another day. On Tuesday, markets in Asia had their first chance to digest the news of the bill’s defeat. A few hours later, as the sun was rising over London, the mood suddenly turned more optimistic than reason seemed to dictate and within a few hours, the London Stock Exchange had made up a third of Monday’s loss. By the time North American markets came online, a true and sustained global rally was underway and by the end if the day, half of the previous day’s losses had been regained.

One can’t help thinking that Paulson would have preferred any rally to wait until after he could get the House to approve his plan. Bolstered by Tuesday’s rally, there is a definite possibility that those that reluctantly voted for the bill may now change their minds before a second vote – at the very least, it could be more difficult to convince those that originally opposed the plan to now support it. Nevertheless, a revised TARA is being readied for another vote on Thursday if it can survive a Senate vote today. Known revisions include increasing the Federal Deposit Insurance Corporation (FDIC) insurable amount for private savings from $100,000 to $250,000 along with some other concessions.

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