Financial Rescue Plan Still in Limbo

You can find more stories like this in our On the Brink series.

The political tides in Washington over the past week have been as turbulent as the Dow Jones Industrial Average, which plummeted a record 777 points Monday as hopes of a government rescue for ailing banks suffered a stunning defeat on Capitol Hill.

And with the future of the plan to provide the federal government $700 billion to buy up banks' troubled assets in limbo after it was voted down 228-205 in the House of Representatives Monday, expect the bumpy ride to continue for the foreseeable future.

The House vote has been halted while leaders who shepherded the bill attempt to sway about a dozen of their nay-saying counterparts to switch sides. A Senate vote is scheduled for Wednesday but it is unclear how things will proceed until a House resolution -- which may involve some legislative tweaking -- is reached.

"Think about the big run-ups and sharp declines over the past 10 days as this story has unfolded," says Michael Branham, a financial planner at Cornerstone Wealth Advisors. "There really have not been any fundamental shifts in the status of the economy or underlying companies and their profits, based on any given news cycle. Instead investors are buying and selling on hope, or lack thereof."

The plan voted down in the House on Monday was the product of several compromises between Congress and the Bush administration, which first proposed it Sept. 18 after the bankruptcy of Lehman Brothers and the federal government's bailouts of American International Group (AIG), Fannie Mae (FNM) and Freddie Mac (FRE).

Lawmakers structured a bill that would provide up to $700 billion in installments -- $250 billion initially and another $100 billion if the president deems it necessary, with another $350 billion available with Congressional approval. The measure included additional protections for taxpayers, as well as restrictions on executive compensation for firms that participate in the program.

Lawmakers are hamstrung by two unpalatable options in a crucial election year: Approve an unpopular and costly bill or risk a swift deterioration in the U.S. markets and economy that could hurt consumers even more. Partisan bickering has bogged down the process, with conservative House Republicans teaming up against an unlikely coalition of Democrats and the Bush administration.

Several Republicans blamed House Speaker Nancy Pelosi's (D., Calif.) speech ahead of the vote, during which she blamed the Bush administration's economic policies for the current crisis and, unsurprisingly, painted Democrats as the heroes. House leaders -- including John Boehner (R., Ohio), Adam Putnam (R., Fla.), Roy Blunt (R., Mo.) and Eric Cantor (R., Va.) -- responded by criticizing her speech after the bill failed to pass muster, saying Pelosi had undermined their efforts for a bipartisan solution.

Steve Diamond, a corporate finance law professor at Santa Clara University, says there is plenty of blame to go around for the current crisis on both sides of the aisle. But because legislators did a poor job of explaining the plan and its benefits to the public, it has been even harder to garner support. Furthermore, says Diamond, those who allow political wrangling to delay action may not recognize the scope of the problems.

"How they screwed up the vote this morning, I don't know," says Diamond. He adds that the proposal "was not framed very effectively" by calling it a "bailout."

Where will the Dow Jones Industrial Average stand at the end of 2008?
	Above 10,000 9000-10,000 8000-9000 7000 to 8000 Below 7000