Lawmakers geared up to vote on Monday on creating a $700 billion government fund to buy bad debt and alleviate the financial crisis while European authorities raced to the rescue of three troubled banks.
With global markets hanging on every twist and turn in Washington, the European banking sector felt the fallout as Belgian-Dutch group Fortis and British mortgage lender Bradford & Bingley faced nationalization.
The rescues came after a weekend of high drama in the first major bank crisis to hit the euro zone in 13 months of global financial turmoil that began in the United States.
House Republicans, balking at such a vast outlay of public money and facing re-election in November, are seen as the main sticking point to passage of the bailout bill.
But senior Republican Sen. Judd Gregg of New Hampshire threw his weight behind the deal, saying he expected the House to vote on the bill on Monday.
President George W. Bush said in a statement the plan being finalized by Congress provides the tools and funding to protect the U.S. economy from a “system-wide breakdown,” and expressed confidence it would be passed quickly.
The dollar edged up against the euro and yen on Sunday while U.S. stock futures held steady. Analysts predicted a Monday relief rally, but warned it might not last.
“The bailout is just a band-aid over a very large problem,” said Kathy Lien, director of currency research at GFT Forex in New York. “It will help Wall Street in the very short term, but it won’t help Main Street — the U.S. economy will remain challenged in many fronts.”
House of Representatives Speaker Nancy Pelosi, a Democrat, said the plan was not a “bailout of Wall Street,” but a way to protect taxpayers and turn around the economy. She stressed it now needed bipartisan support. Senate Majority Leader Harry Reid said the Senate could take up the bill by Wednesday.
Treasury Secretary Henry Paulson said he was confident the program will be enough to free up jammed financial markets and keep credit flowing.
Congressional leaders from both parties said they had a tentative agreement on Sunday, but questions abound as to whether the U.S. financial rescue plan, which would use taxpayer funds to buy up toxic mortgage debt, would restore confidence to shaky markets and head off a deeper downturn.
“We will be given nitroglycerin to prevent a heart attack and get some color back in our face,” said Sung Won Sohn, professor of economics at California State University.
EUROPEAN BANK RESCUES
In a sign of the spreading financial crisis, Belgian-Dutch financial group Fortis faced a shotgun nationalization after European Central Bank President Jean-Claude Trichet held emergency talks with Dutch and Belgian officials to rescue one of Europe’s top 20 banks.
The Belgian, Dutch and Luxembourg governments agreed to inject 11.2 billion euros ($16.4 billion) into the banking and insurance company, which will sell the parts of Dutch bank ABN AMRO that it bought last year, precipitating its troubles.
In London, regulators were also preparing to nationalize troubled mortgage lender Bradford & Bingley and were discussing a sale of its savings deposits and branches, people familiar with the matter said.
In Germany, Hypo Real Estate was in urgent talks with banking regulator Bafin and the finance ministry about solving a refinancing squeeze at the bank, sources with knowledge of the matter said on Sunday.
“Up to now, the typical global investor saw most of the stress here in the United States,” said David Dietze, chief investment strategist at Point View Financial Services in New Jersey, describing the Fortis news as “a whopper.”
“Now investors may say ‘Gee, even though a bill may get passed in the U.S. … can the Europeans move as quickly? Do they understand the problem?’” he said.
The U.S. banking system also faced more turmoil. Wachovia Corp is in talks with rivals to be taken over, sources familiar with the situation said on Sunday, after the U.S. bank’s shares fell 27 percent on Friday due to ongoing concerns about its portfolio of illiquid mortgage assets.
Citigroup Inc is among the parties in talks with Wachovia, the two sources said, and one source said Wells Fargo & Co was also in discussions.
QUALIFIED BIPARTISAN SUPPORT
U.S. congressional leaders from both parties emerged early on Sunday with a tentative agreement that altered key parts of a Wall Street bailout program initially proposed by the Bush administration.
Both U.S. presidential candidates offered qualified support for the bailout proposal, an issue that threatens to overshadow their campaigns with less than six weeks until the election.
“This is something that all of us will swallow hard and go forward with,” Republican John McCain said in an interview with ABC television. “The option of doing nothing is simply not an acceptable option.”
Democrat Barack Obama said he was likely to back the package. “My inclination is to support it,” he told CBS television’s “Face the Nation.”
PUBLIC ANGER SIMMERS
With many Americans are struggling to save their homes from foreclosure, lawmakers were bracing for a grassroots backlash against a bailout for Wall Street banks, which many blame for creating the overheated housing market and bad loan crisis.
In the final hours of talks, Democrats and Republicans rushed to add safeguards for taxpayers and provisions that would allow the government to recover funds if housing prices recover and its holdings of bad debt gain value.
House Republican leaders were spending more than two hours behind closed doors answering members questions about details of the legislation but there were few signs the bill was endangered.
“They are much happier now” than last week when anger boiled over with the Treasury’s initial proposal, said Rep. James Walsh of New York about his Republican colleagues.
Rep. Marsha Blackburn, a Republican from Tennessee, said she was leaning against the measure, but added “probably it’s going to pass.”
The proposed legislation would disburse the $700 billion in stages. The first $250 billion would be issued when the legislation is enacted, while another $100 billion could be spent if the president decided it was needed. The remaining $350 billion would be subject to congressional review.
Institutions selling assets under the plan would issue stock warrants to the government, a step intended to give taxpayers a chance to profit if markets recover.
The plan also would let the government buy troubled assets from pension plans, local governments and small banks.
In response to a clamor for limits on executive pay, no executives at participating firms could get multimillion-dollar severance packages — known as golden parachutes.
An oversight board of top officials, including the Federal Reserve chairman, would supervise the program, while its management also would be under close scrutiny by Congress’ investigative arm and an independent inspector general.
The government could also use its power as the owner of mortgages and mortgage-backed securities to help more struggling homeowners modify the terms of their home loans.
“Passage of the plan is just step one. Step two is execution and there remains considerable uncertainty about how assets will be purchased,” said Michael Pond, Treasury strategist with Barclays Capital in New York.
“We expect some of the recent flight to liquidity in Treasuries to be unwound as a bill gets passed, but volatility will likely remain until there are clear signs this will actually work,” he said.