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Explainer: What next for the bailout plan?

  • Story Highlights
  • U.S. Senate approves $700 billion bailout plan to prop up U.S. financial system
  • Plan still requires approval in House of Representatives, which rejected earlier bill
  • House lawmakers expected to vote on revised bill Friday
  • Advocates of rescue plan say it is necessary to prop up ailing U.S. economy
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(CNN) -- The U.S. Senate voted Wednesday by 74 votes to 25 to approve a $700 billion economic bailout plan. The proposals would allow Treasury Secretary Henry Paulson to buy "toxic debts" from banking institutions to allow them to resume borrowing normally. But the plan still requires approval in the House of Representatives, which rejected a previous version of the bill on Monday.

What next for the bailout plan?

The Senate vote puts lawmakers in the House of Representatives under intense political pressure -- though not constitutional pressure -- to endorse measures which U.S. President George W. Bush, top Treasury officials and leading lawmakers have argued are necessary to underpin the foundations of the entire U.S. economy.

"With the improvements the Senate has made, I believe members of both parties in the House can support this legislation," Bush said in a statement. "The American people expect -- and our economy demands -- that the House pass this good bill this week and send it to my desk."

The revised bill is expected to be presented to lawmakers in the lower house Friday.

Why did lawmakers in the House of Representatives reject the original bill?

Many lawmakers, especially on the Republican side of the House, had voiced concerns about the $700 billion cost to U.S. taxpayers, arguing that ordinary citizens were being asked to foot the bill to clean up a mess created on Wall Street. Fortune magazine's Washington bureau chief Nina Easton said that many lawmakers, facing re-election in November, feared a backlash among voters if they backed they plan.

"This legislation is giving us a choice between bankrupting our children and bankrupting a few of these big financial institutions on Wall Street that made bad decisions," said Republican Congressman John Culberson. Other Republican free market advocates argued that the bill would have been a blow against economic freedom.

On the Democratic side, there were concerns that the bill did not provide enough protection for taxpayers. Others said the legislation had been rushed through without due consideration. "Like the Iraq war and Patriot Act, this bill is fueled by fear and haste," said Democrat Lloyd Doggett. Video Watch Republicans lay the blame at Democratic feet »

What revisions have been made to the bill?

The main change to the original bill raises the threshold up to which bank deposits are protected by Federal Deposit Insurance from $100,000 to $250,000, a measure intended to address faltering confidence in the markets.

"Unfortunately, there is an increasing crisis of confidence that is feeding unnecessary fear in the marketplace," Federal Deposit Insurance Corp. Chairman Sheila Bair said this week. "To address this crisis of confidence, I do believe that it would be helpful for the FDIC to have the temporary ability to raise deposit insurance limits."

The bill also includes a "Mental Health Parity" provision requiring health insurance companies to cover mental illness at parity with physical illness.

What happens if the bill fails again?

Bush, who last week called for urgent action in a televised address, says rejection of the bill by Congress would be a catastrophe for Wall Street and the wider economy. Billionaire Warren Buffett said that failure to agree a plan would leave the U.S. facing the "biggest financial meltdown in American history."

But the immediate consequences would be felt most sharply in the financial markets, already badly bruised by weeks of heavy losses. Approximately $1.2 trillion had been wiped off the market value of U.S. stocks by the close of Monday trading in reaction to the bill's rejection in the House of Representatives. The Dow Jones index suffered its worst ever points loss, losing 778 points -- a seven percent slide -- although markets have pared losses since in expectation that a revised version of the bill will eventually be passed.

What about the international consequences?

International financial institutions have been hurt as badly as those in the U.S. by the credit crisis and banks and stock markets all over the world face fresh pain if the rescue plan fails.

Governments and central banks in Europe and Asia have taken action to protect their own ailing financial businesses, pumping billions of dollars into money markets and nationalizing and bailing out struggling banks and companies struggling to survive the credit crisis.

The Bank of England said Thursday it expected further cuts in lending by banks and other institutions in the UK over the next three months due to a decline in credit availability.

Belgium's Dexia on Tuesday became the latest bank to be rescued by government funding with the governments of Belgium, the Netherlands and Luxembourg injecting $9.2 billion into the business to keep it afloat. The move came just two days after the same countries pumped $16.4 billion into failing insurance company Fortis. Iceland's government has also nationalized the country's third largest bank, Glitnir. Ireland's government said Tuesday it would guarantee all deposits in Irish banks following a massive fall in the value of banking stocks.

European Union leaders will meet Saturday for summit talks aimed at coming up with joint measures to tackle the crisis after European Commission President Jose Manuel Barroso urged governments to work together.

How does this affect the banks?

The financial landscape has already been radically transformed by the collapse in U.S. house prices and the subsequent credit crunch with investment bank Lehman Brothers going bankrupt, Merrill Lynch being bought out by Bank of America and the U.S. government intervening to prop up mortgage lenders Fannie May and Freddie Mac and insurance giant AIG.

The failure of the bailout plan would only undermine confidence in the banking system further, pushing more banks into trouble as customers withdraw their money. "They have to pass some sort of bill otherwise soon it's going to get down to the point where people actually take money out of the bank and put it in their mattress," trader Wayne Carson told CNN. Video Watch a Wall St. veteran tell why he thinks the bailout is vital »

How does this affect the rest of us?

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The credit crunch has already affected the entire economy with "Main Street" already feeling the squeeze from high fuel prices, rising food costs and rising unemployment. Many economists fear the U.S. is heading for recession. With banks unable or unwilling to lend to each other until the credit crisis eases up, many companies may be unable to borrow the money they need to pay their weekly bills, including salaries. The likely consequence would be further job losses.

"This is not about suits on Wall Street making their salaries, this is about financial institutions who loan money to your bank so that you can get a loan or you can buy a car or you can get a mortgage or you can get a credit card... this is our financial system that is freezing up," said CNN senior business correspondent Ali Velshi.

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