Fed's Reworked Bailout Plan: A Gift That Keeps Giving?

The proposed economic “recovery” plan is starting to resemble a Christmas tree as lawmakers rush to hang shiny new ornaments on the controversial legislation that’s now before Congress.

Earlier this week, a stripped-down version of the proposed $700 billion bill failed to pass the U.S. House of Representatives by 12 votes, a move that sparked a swift and furious decline in the U.S. stock market. Since then, credit markets have virtually seized up and major businesses, municipalities and consumers have been forced to put their businesses on hold.

Facing another tough bailout vote, lawmakers are scrambling to add measures they hope will insure passage. Since the bill’s Monday defeat,  legislators, lobbyists and various pressure groups have been pushing for ways to make the bill more attractive to congressional naysayers. The Senate will vote on its version of the bill today.

Here’s some of the ideas floating around and a progress report on their chances of being in any final rescue plan.

• Raising bank deposit insurance. Community banks, small business groups and even the federal bank regulators are advocating temporarily boosting the current $100,000 per account limit to $250,000.  Advocates figure that if the U.S. taxpayer is going to authorize $700 billion for the U.S. Treasury to buy toxic mortgages and take them off lenders’ balance sheets that bank customers should also enjoy some added protection. Chances of being passed: Excellent. 
• Tax credits. Some new or extended energy and other tax credits will be attached to the bailout bill. While these credits have nothing directly to do with the economic recovery plan, they provide antsy lawmakers a reason to back the bailout. Chances of being passed: Good
• Suspend “mark to market” accounting.  Conservative Republicans, including former House Speaker Newt Gingrich, advocate suspending the relatively new accounting rule. Simply put, the rule requires lenders to mark assets at current market levels. (This stipulation emerged in the aftermath of the Enron scandal, when companies were marking assets to a ”model” market–which was often vastly overstated or fictitious.)  Under the current mark to market rules, banks are having to write down real estate assets to zero and suffering huge losses. Already, securities regulators have tempered the mark to market ruling, giving lenders more elbow room but also making it less likely a legal suspension will be granted. Chances of being passed: Poor.
• Suspend the capital gains rate.  This is another favorite of House Republicans, who want to suspend for two years the capital gains rate of 15 percent for individuals and 35 percent for corporations.  Erasing the capital gains will give holders of bad properties an incentive to sell at more reasonable rates, giving the economy a boost. Chances of being passed: Very poor.

No matter what ornaments are added to this legislation, taxpayers are still being asked to promise a whopping $700 billion to rescue the economy. And although there’s a possibility that entire amount may not be needed, this bill is no early Christmas gift.