Emergency Economic Stabilization Act of 2008

Emergency Economic Stabilization Act of 2008 (EESA), legislation passed by the U.S. Congress and signed into law by Pres. George W. Bush on Oct. 3, 2008. It was designed to prevent the collapse of the U.S. financial system during the subprime mortgage crisis, a severe contraction of liquidity in credit markets worldwide brought about by widespread losses in the subprime mortgage sector. The Emergency Economic Stabilization Act (EESA) sought to restore liquidity to credit markets by authorizing the secretary of the treasury to purchase up to $700 billion in mortgage-backed securities and other troubled assets from the country’s banks, as well as any other financial instrument the secretary deemed necessary “to promote financial market stability.” The act also included provisions to minimize foreclosures on federally owned mortgages, to recover possible future losses on the government’s mortgage investments, to prevent windfalls for executives of banks that benefit from the act, and to monitor the investments of the Treasury Department through reports to Congress and a specially created oversight board.

Bush and Secretary of the Treasury Henry Paulson first proposed the EESA in September 2008, and the measure was introduced in the House of Representatives as an amendment to a bill to provide tax relief to members of the uniformed services. Despite intense lobbying by the White House and support by leaders of both the Democratic and Republican parties and by Barack Obama and John McCain, the presidential nominees of the two parties, the House rejected the plan 228–205 (two-thirds of Democrats and one-third of Republicans voted in favour of the measure) on Sept. 29, 2008. The measure was opposed in part because many in Congress—and in the public—considered the plan an unfair subsidy by taxpayers to Wall Street bankers. Three days later the Senate amended a bill to provide parity for mental-health insurance coverage with the EESA and other bills, including measures to create tax incentives for energy investments and to extend various exemptions for middle-class taxpayers. The new legislation, though $150 billion more expensive than the original House version, was passed by the Senate and the House after many representatives who had opposed the EESA changed their minds, in part because of continuing deterioration of the financial markets and shifting public opinion. The legislation was signed into law by Bush on Oct. 3, 2008.

The EESA authorized the treasury secretary to establish a Troubled Asset Relief Program (TARP) to protect the ability of consumers and businesses to secure credit. The Treasury Department’s purchases of illiquid assets under the TARP would make it easier for banks to extend credit and would thereby increase confidence in the credit markets. The EESA featured a graduated release of funds to the Treasury Department. The treasury secretary was immediately authorized to spend up to $250 billion; an additional $100 billion would become available if the president confirmed that the funds were needed, and a further $350 billion would be authorized upon confirmation by the president and approval by Congress. The EESA also directed the treasury secretary to create a program to allow banks to insure their troubled assets with the government.

The EESA required the Treasury Department to modify distressed loans when possible to prevent home foreclosures. Many of these subprime loans were extended to individuals who were unable to qualify for normal loans or unwilling to provide certain financial information. The EESA also directed other federal agencies to make similar adjustments to the loans they owned or controlled, and it made various improvements in the Hope for Homeowners program, which allowed certain homeowners to refinance their mortgages with fixed rates for terms of up to 30 years.

The EESA mandated that banks that sell troubled assets to the government under the TARP provide warrants to ensure that taxpayers benefit from any future growth the banks may enjoy as a result of their participation in the program. Furthermore, the act required the president to submit legislation to recoup from the financial industry any net loss to taxpayers that had occurred after a five-year period.

The EESA also included provisions designed to prevent executives of participating banks from unjustly enriching themselves. Under the act, the banks would lose certain tax benefits and, in some cases, would be forced to limit executive pay. The EESA imposed limits on so-called “golden parachutes” by requiring that unearned bonuses of departing executives be returned. Finally, the EESA established an oversight board to ensure that the treasury secretary did not act in an “arbitrary” or “capricious” manner, as well as an inspector general to protect against waste, fraud, and abuse. The Treasury Department was required to report to Congress on its use of the funds as well as on its progress in addressing the crisis.

Paulson at first intended to limit his purchases under the EESA to mortgage-backed securities and other troubled assets. In the days immediately following the law’s passage, however, it became increasingly apparent that this approach alone would not restore liquidity to the credit market soon enough to avert additional bank failures and further damage to the economy. After meetings in Washington with finance ministers from other member countries of the World Bank and the International Monetary Fund, Paulson and Bush announced plans to use $250 billion immediately to buy stock in troubled banks, a move designed to expand their capital bases directly so that they could begin lending again as quickly as possible.

Supporters of the EESA argued that the act was necessary to extend immediate assistance to homeowners and restore confidence in the financial markets, thereby preventing the collapse of the financial system and a deep recession. Opponents maintained that the EESA was vaguely formulated, that it gave the treasury secretary too much power, that it was too costly, and that it unfairly benefited investors while failing to address the immediate crisis or the potential long-term effects on the economy.