By Large Margin, Senate Passes Bailout Bill

Treasury’s $700 billion rescue plan for the financial markets passed the Senate Wednesday night, giving the White House new confidence it has turned the corner and can win final approval from Congress by Friday.

The 74-25 roll call endorsing the package featured a rare joint-return appearance by the two major presidential candidates, Sens. Barack Obama and John McCain, who both supported the measure.

The Senate galleries, usually empty at night, were packed with visitors on the left and right, and senators voted from their desks as if to underscore the seriousness of the legislation. Shortly before the vote, Senate Minority Leader Mitch McConnell (R-Ky.) tried to capture the moment for posterity, calling this breakthrough “one of the finest moments in the history of the Senate. This is the kind of vote we are sent by our people to cast.”

Majority Leader Harry Reid added that “each United States senator this evening is facing a critical test of leadership.”

A second vote was needed immediately after to complete final passage, but that is not in doubt. The first vote Wednesday night was the bigger test and the administration is betting that with this bipartisan showing, it can marginalize the remaining opposition in the House, due to vote Friday.

Caution is still the watchword in what remains a ticklish political situation after Monday’s loss in the House. But the revised Senate package blends in more than $100 billion in popular tax breaks as well as aid to rural schools important to House Republicans. And to build support among small town community banks, the bill raises the cap on insured deposits from $100,000 to $250,000.

“This is not just a Wall Street crisis – it’s an American crisis, and it’s the American economy that needs this rescue plan,” Obama said in a floor speech. And behind the scenes he is making phone calls to House Democrats helping to shore up that vote Friday.

But with each permutation, the bill has steadily grown in size. Treasury’s initial plan was about three pages long. The House version, which failed, stretched to 110. The Senate substitute runs over 450 pages.

Tucked away in the tax chapter is a virtual bill onto itself: landmark mental health parity legislation that bars group plans from imposing stricter limits on mental health patients than individuals under the same plans who suffer from physical illnesses demanding surgery and hospitalization.

The bill has lingered for months while lawmakers argue over offsets to pay for its estimated $3.8 billion in five years costs. But in the current climate, all budget discipline has collapsed and it is simply added to the tax cut package.

In fact, with all eyes on the $700 billion Treasury bill, Congress has executed its own reverse option, running the ball around a distracted President Bush.

A massive $638 billion stop gap spending bill, with $32 billion in emergency appropriations, sailed through this past weekend without a whisper. And while this may seem “chump change” next to $700 billion, next year’s deficit could exceed $600 billion. And unlike Treasury’s plan to buy and sell mortgage assets, it’s money that is not coming back.

The Congressional Budget Office, in a letter released Wednesday, estimated that the higher cap for insurance on bank deposits would increase the share of deposits protected by 15% or $700 billion. The Federal Deposit Insurance Corp. would be exposed then to more risk, but the adjustment is widely popular and aimed especially at community banks which can be helpful in building small-town support for the larger bill.

When the Treasury plan went down in the House, it was clearly hurt by the public perception that it was nothing more than a costly bailout for Wall Street. Since then there has been a more concerted effort by proponents to broaden grassroots support around the nation.

The U.S. Chamber of Comerce has begun radio ads targeted at lawmakers. The Republican and Democratic chairmen of national governors associations for the two parties released a joint letter Wednesday urging Congress to act. And the courtship of community banks – by raising the insurance level for deposits – builds on a decision over the weekend to also include tax breaks for local banks that were hurt by the government takeover of the two mortgage finance giants Fannie Mae and Freddie Mac.

The biggest piece in the tax package is an extension of protections for millions of middle- and upper-middle-income families who would otherwise find themselves exposed to the higher levy under the alternative minimum tax. This alone accounts for about three-quarters of the cost, $78.8 billion in 2009. Almost $14 billion more can be attributed to a variety of tax break extensions important to business, including the research and experimentation credit worth about $8.4 billion in 2009.

At a time of high energy prices, the bill includes about $18 billion in tax benefits for renewable fuels, to be financed at the expense of the oil industry in some cases. The rural school aid is smaller — about $3.3 billion over the next five years — but has great importance for many Western communities and could be a selling point in the House.

The strategy is not without risk in the House given the added costs of the tax package. Fiscal conservatives, like Rep. John Tanner (D-Tenn.) were restless and could feel they are being stiff armed by the Senate which has refused to do more to offset the costs.

Any Democratic defections puts that much more pressure on House Republicans to grow their vote well beyond the 65 members who backed the bill Monday.

Interviews suggested it was tough sledding but moving. “It’s getting close,” said Rep. Steve LaTourette (R-Ohio), who opposed the measure Monday and still wants to make a last ditch effort to trim back the $700 billion total. Rep. John Shadegg (R-Ariz.) said the added FDIC insurance coverage will help bring him over, and McCain’s support can also make it easier for House Republicans to shift back toward the administration.