Washington addresses the credit crisis: in addition to creating the Troubled Asset Relife Program, the Emergency Economic Stabilization Act of 2008 also contains tax and other provisions of interest to state and local governments.

• Author: Berger, Barrie Tabin
• Position: Federal Focus

Efforts to kick-start the nation's credit markets came in the way of a $700 billion rescue measure signed by the president on October 3, 2008. The Emergency Economic Stabilization Act of 2008 (Public Law 110-343) is intended to help stabilize the financial markets and ease the credit crisis plaguing private companies and state and local governments.

At the heart of the measure is the creation of the Troubled Asset Relief Program (TARP), which initially focused on rescuing the financial industry by allowing the Treasury Department to purchase distressed assets linked to mortgage-related securities. That approach has since been abandoned in favor of putting capital directly into healthy banks in exchange for partial ownership.

The enactment of the new law came with great speed, but also with considerable obstacles. A majority of Republicans in the House of Representatives, along with some Democrats, initially voted against the legislation, arguing that the scope of Treasury's power was too broad, the cost to taxpayers too high, and the crux of the measure--government intervention in the market m would fundamentally alter the U.S. financial system and undermine free-market principles.

But members of Congress reconvened to consider a slightly modified measure in the face of continued dire warnings from Treasury officials and the private sector that economic disaster would be inevitable without Congressional intervention. Another impetus was the general public's realization that the impact of the crisis was not limited to Wall Street executives, but was in fact hurting "Main Street" vendors and individuals. This new measure also included popular tax breaks and an increase in federal deposit insurance limits in an effort to garner support from additional members of Congress. The final bill, H.R. 1424, was approved overwhelmingly.

TARP AND OTHER AGENCY ACTIONS

The new law was intended to authorize the Treasury Department to create the TARP. It confers upon the Secretary of the Treasury broad powers to purchase up to $700 billion in residential and commercial mortgages and any mortgage-backed securities, obligations, and other instruments that were originated before March 14, 2008, from financial institutions that have significant operations in the United States and are not owned by a foreign government. Congress initially appropriated $350 billion for TARP, and under certain conditions, the Treasury may request another $350 billion from Congress. To keep a check on the broad powers granted to the Treasury Department as part of the TARP, the new law created the Financial Stability Oversight Board to oversee the agency's activities, although this board has yet to be formally established.

In November, Treasury Secretary Henry Paulson backtracked from his initial proposal and said none of the initial $350 billion in TARP dollars would be used to purchase troubled assets. Instead, the...