US Congress approves $700b bailout package

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NEW YORK (Washington), Oct 4 (Reuters): The US Congress has finally approved a $700 billion bailout package for US banks as efforts to head off a spreading global financial crisis hung in the balance.
The House of Representatives approved the largest ever financial rescue plan in US history by a vote of 263-171. That vote sent the measure to President George W. Bush, who quickly signed it into law, concluding two weeks of haggling in Washington that had roiled and captivated global markets.
Markets pivoted on passage of the bailout, with stocks drifting from highs and the dollar slipping as the focus began to shift from the immediate response to the financial crisis to signs of a gathering recession.
"This probably comes a bit too late. If this had been done earlier, it probably would have had a much bigger impact in restoring confidence," said Anna Piretti, economist at BNP Paribas in New York. "Over the past two weeks what we have seen is an accumulation of weak reports."
Earlier, the hobbled financial sector was bolstered as Wells Fargo & Co stepped in to buy Wachovia Corp.
But in signs of the spreading crisis, California said it was running out of money, France said the world stood on the "edge of the abyss" and European leaders divided over their response to the banking sector's difficulties.
US Treasury Secretary Henry Paulson, who had been the administration's chief lobbyist for the plan, said regulators would get going quickly to implement the emergency power to start buying up distressed assets from banks.
"We have shown the world that the United States of America will stabilize our financial markets and maintain a leading role in the global economy," Bush said in a short statement delivered before cameras outside the White House.
The House had shocked world markets last Monday by rejecting a previous draft. With elections on November 4, lawmakers from both parties were wary of voter backlash in asking taxpayers to pay for Wall Street's mistakes.
Last Friday, speaker after speaker from both parties on the House floor said rejecting the bailout could have devastating consequences for an already slowing US economy, arguing the bill was as important for small businesses, homeowners, students and pensioners as it was for the financial sector.
Ahead of the vote, US stocks had risen on hopes for the bailout plan and the deal to buy Wachovia.
Wells Fargo, one of the strongest US banks, said it did not need the government help that Citigroup Inc required in an earlier effort to rescue Wachovia.
Earlier on Friday, the United States reported its biggest monthly job loss in 5-1/2 years, more evidence of an approaching recession. Data showed the US services sector holding up.
In Britain, Prime Minister Gordon Brown shook up his cabinet and authorities took three separate steps to try to shore up the financial system.
Bad news mounted in the European financial sector.
Dutch-Belgian banking and insurance giant Fortis was broken up on national lines, with the Dutch government taking over its operations in the Netherlands, after an earlier rescue effort and asset sale failed.
In Switzerland, UBS AG, hardest hit among European banks by its exposure to subprime-related holdings, said it would cut 2,000 investment banking jobs -- on top of the 4,100 positions cut in the past year.
Meanwhile, US House Minority Leader Roy Blunt, a Missouri Republican, credited the "active participation" of Republican presidential candidate John McCain and Democratic candidate Barack Obama in convincing some House members to support the bill.
Conservative Republican House members, aware of a wave of opposition to the bill as they prepared for Nov. 4 elections, attacked it as a step toward "socialism," while liberal Democrats blasted it as a bailout for Wall Street "fat cats."
But a majority decided to forge ahead with the plan, first proposed on Sept. 20 by the Bush administration and modified over two weeks of frantic negotiations on Capitol Hill.
The bailout bill will empower the Treasury Department to purchase up to $700 billion of broken mortgage-backed securities that are choking world capital markets. Treasury would dump the securities into a vast federal portfolio in hopes that will unclog the markets.
The bill leaves unanswered precisely how Treasury would price and purchase the assets and manage them -- questions that economists have said will decide whether the plan works and whether taxpayers will one day get their money back.
The measure will potentially add about $850 billion to the US debt at a time when annual budget deficits are already hitting record levels.
In five years, if the bailout has cost taxpayers money, the president will have to submit legislation setting a levy on Wall Street to cover those costs.
What's more, lending should remain extremely tight. About the best investors can hope for, analysts said, is a very slow thaw in frozen credit markets, and even that's not a sure bet.
The cost for banks to borrow dollars over a three-month horizon shot up for a fifth straight day on Friday, signaling a widespread lack of confidence.
There have been some hopeful signs of late. Markets reacted favorably to news on Friday that Wells Fargo & Co, one of the strongest U.S. banks left, had agreed to buy Wachovia, which holds a large portfolio of troubled mortgages -- without government help.
Hope that financial services stocks may be nearing a bottom also blossomed as Warren Buffett put $3 billion into economic bellwether General Electric this week, a move that comes shortly after his $5 billion investment in Goldman Sachs.