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Special> Coping With the Global Financial Crisis> Background
UPDATED: October 25, 2008  
Bailout of U.S. Financial System

The Emergency Economic Stabilization Act of 2008 (enacted Oct. 3, 2008), commonly referred to as a bailout of the U.S. financial system, is a law authorizing the United States Secretary of Treasury to spend up to 700 billion U.S. dollars to purchase distressed assets, especially mortgage-backed securities, from the nation's banks.

Such an Act was proposed by U.S. President George W. Bush and Treasury Secretary Henry Paulson during the U.S. financial crisis of September–October 2008.

A bailout, in economics and finance, is a fresh injection of liquidity given to a bankrupt or nearly bankrupt entity, such as a corporation or a bank, in order for it to meet its short-term obligations. Often bailouts are by governments, or by consortia of investors who demand control over the entity as the price for injecting funds.

Often a bailout is in response to a short-term cash flow crunch, where an entity with illiquid, but sufficient, assets is given funds to tide it over until short-term problems are resolved.

The original proposal by Bush and Paulson was three pages, as submitted to the House of Representatives. The purpose of the plan was to purchase bad assets, reduce uncertainty regarding the worth of the remaining assets, and restore confidence in the credit markets.

The text of the proposed law was expanded to 110 pages and was put forward as an amendment to H.R. 3997. The amendment was rejected via a vote of the House of Representatives on Sept. 29, 2008, by a margin of 228-205.

On Oct. 1, 2008, the Senate debated and voted on an amendment to H.R. 1424, which substituted a newly revised version of the Emergency Economic Stabilization Act of 2008 for the language of H.R. 1424.

The Senate accepted the amendment and passed the entire amended bill by a vote of 74-25. Additional unrelated provisions added an estimated 150 billion U.S. dollars to the cost of the package and increased the size of the bill to 451 pages.

The amended version of H.R. 1424 was sent to the House for consideration, and on Oct. 3, the House voted 263-171 to enact the bill into law.

President Bush signed the bill into law within hours of its enactment, creating a 700 billion U.S. dollar Troubled Assets Relief Program to purchase failing bank assets.

(Agencies October 14, 2008)

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