Bad News on Housing

We continue to believe that the Dodd/Shelby housing bill is important for financial stocks and the market as a whole.  Yesterday's 83-9 vote on cloture, the Senate process for limiting debate, seemed to signal passage.

After the market close today it became apparent that there are additional hurdles, suggesting that  the bill will not pass before the July 4th Congressional recess.  One Senator, John Ensign (R-Nev) is using the full range of arcane Senate rules to block the bill.  Sen. Ensign wants to add an amendment concerning tax credit incentives for renewable energy.  The problem is that the House has already rejected this non-germane amendment.  Allowing it would also open the door for many other non-germane amendments.

The sponsors insist that the measure will eventually pass, even if brought back after the July 4th recess.  The markets are not very patient on issues like this, and the potential for a Bush veto remains.

Our own feeling is that if the bill passes,  the President will face extreme pressure to sign it.  The measure has overwhelming support in both parties.  Legislators campaigning this year will want to show that they were helping distressed homeowners.  Some of the key Republican states are those most affected by foreclosures.

Please note that we are doing market analysis here -- not an assessment of the merits of the legislation.  Many market pundits seem willing --even eager -- to see a complete cratering in housing prices with the fancy name of "price discovery."

We shall return to the merits of the legislation at a future date.  For now, we suggest that investors considering banks or other financial stocks should keep this development in mind.

And meanwhile -- note how a single Senator had the power to block legislation that had the overwhelming support of both parties.  It is a lesson in how difficult it is to pass a bill -- a subject from one of our classes in the old days.