Critical stage for US bailout plan

The US Congress and the Bush administration are under intense pressure to negotiate a US$700bn rescue for the financial industry.

The US House of Representatives speaker, Nancy Pelosi, and George W Bush both expressed optimism yesterday that a deal could be reached soon to stave off the worst US financial crisis since the Great Show more

WASHINGTON // The US Congress and the Bush administration are under intense pressure to negotiate a US$700bn (Dh2.5 trillion) rescue for the financial industry to free up frozen credit before world markets reopen after the weekend. The US House of Representatives speaker, Nancy Pelosi, and George W Bush both expressed optimism yesterday that a deal could be reached soon to stave off the worst US financial crisis since the Great Depression.

Talks on Thursday had collapsed in acrimony. A second day of intense negotiations yesterday between rancorous Democrats and Republicans failed to produce accord on how to structure a deal allowing the government to buy up soured assets that are choking credit. There were fears that US stocks, which ended up mostly higher yesterday as bank shares rallied on optimism for a deal, would take a dive if there is no accord before markets reopen, with reverberations in the world economy.

"I believe that progress has been made," said Ms Pelosi, a California Democrat. "We will not leave until legislation is passed. We will be working through the weekend to achieve that end." Early in the week there had been hopes for speedy approval of the plan by Congress, crafted by the treasury secretary Henry Paulson and the Federal Reserve chairman Ben Bernanke and presented to Congress last weekend.

But conservative Republicans balked. With an eye to bring them on board, Democrats have now offered to add a mortgage insurance measure. Republicans had wanted the government to offer coverage for roughly half of all mortgage-backed securities that it does not already insure. Although Democrats control Congress, they are hesitant to pass a bailout bill without rank-and-file Republican support because it could leave their party politically exposed just weeks before the presidential and congressional elections.

The bailout dominated barbed early exchanges on Friday evening in the first presidential debate between the Republican John McCain and the Democrat Barack Obama in the run-up to the Nov 4 election. Both candidates said they wanted a deal soon but acknowledged the price of the rescue plan would force the next president to make tough choices and pare back government spending.

The $700bn bailout, the largest of its kind in US history, aims to remove soured assets from the books of fragile banks and revive frozen credit markets. The value of the assets, mostly mortgage-related, tumbled as the US housing market slumped.

Even with a deal, the US economy faces serious problems ? sluggish growth and rapidly falling home prices. "Wall Street is banking on a definitive agreement in place before markets open on Monday," said Fred Dickson, director of retail research at D.A. Davidson & Co in Lake Oswego, Oregon. "The plan is crucial to keeping the economy afloat." The 13-month-old credit crisis came to a head this month after the US government's takeover of mortgage companies Fannie Mae and Freddie Mac, the bailout of insurer American International Group Inc, as well as the bankruptcy filing by Lehman Brothers.

Yesterday, bank stocks tumbled as institutions worldwide hoarded cash and showed a growing reluctance to lend, driving rates that they charge each other on loans to a record high in London. "What you're going to see is the strong stronger, and the weak are going to die off," said William Smith, president of Smith Asset Management in New York. Global money markets dried up, forcing increased injections of cash from central banks. With no relief in sight, investors flocked to the safety of cash and US government securities. * Reuters