Friday, October 3, 2008

Bailout Focus On House as Crisis Spreads

Bailout Focus On House as Crisis Spreads

By Eddie Evans and Ralph Boulton

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S
hockwaves from the global credit crisis spread on Thursday, threatening industry and jobs worldwide and putting pressure on Congress to finish up a $700 billion bailout of the U.S. financial sector.

The fate of the rescue plan, passed by the Senate 74-25 on Wednesday night, now lies with the House of Representatives, which is expected to vote on the bill on Friday.

The House rocked global markets on Monday by rejecting an earlier version of the bailout, which President George W. Bush has called the "essential to the financial security of every American."

European Central Bank President Jean-Claude Trichet said economic activity was weakening in Europe and opened the door to interest rate cuts, while in the United States data suggested a recession may be approaching.

U.S. factory orders fell 4 percent in August, on top of data on Wednesday that showed manufacturing activity in September at its weakest since the 2001 recession.

U.S. jobless claims rose last week to their highest level in seven years, ahead of September payrolls data due out on Friday.

Oil prices fell almost $3 a barrel on an expected slowdown in economic activity around the world. The dollar rose to a year high against the euro after Trichet's comments and major U.S. stock indexes fell more than 2 percent.

At the Paris Auto Show, top automakers including General Motors Corp and Ford Motor Co warned of tough times, as evaporating credit for consumers cuts demand and could force production cuts and job losses.

"The problems of subprime and credit crunch are now all over the world," Ford Chief Executive Alan Mulally said. "The downturn is longer and deeper than we foresaw a year ago," he said.

In a week marred by bank rescues across Europe, French President Nicolas Sarkozy's office said he would host the leaders of Britain, Italy, Germany and the ECB on Saturday to discuss a response to the credit crisis. Sarkozy denied reports a 300 billion euro ($415 billion) plan akin to the U.S. bailout was under consideration.

Market participants remained cautious about the U.S. bailout bill's prospects in the House.

"I'm not betting anything here because I don't know what the House is going to do," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont. "If this bill doesn't pass in the House, it's game over."

Even if the bill is passed, worries remain over the global economic outlook, said Masamichi Adachi, senior economist at JPMorgan in Tokyo. "It's a completely different world now. All the things U.S. authorities are doing now are simply aimed at preventing a global meltdown."

"STILL UNCERTAIN"

The bailout plan, equivalent to some $2,300 per American, is intended to reinvigorate credit markets and interbank lending that has frozen up while overleveraged financial institutions staggered under the weight of failed mortgages.

It has stirred fierce criticism from those who see it as help for a Wall Street guilty of taking reckless risks in pursuit of short-term profit.

Under the deal, the Treasury would take on illiquid assets held by banks, in the hope of restoring confidence and unfreezing credit markets vital to the wider economy.

Interbank lending rates remained high, a sign that banks were not lending to each other, despite the Senate vote and large injections of cash by central banks.

The Fed said the U.S. commercial paper market contracted for the third straight week, as business lending and borrowing effectively shut down.

President Bush, his authority eroded by the approaching end of his term in office, welcomed Senate passage of the package on Wednesday and urged the House to do the same, quickly.

"With the improvements the Senate has made, I believe members of both parties in the House can support this legislation," Bush said in a written statement.

Senate leaders hope that sweetening the plan with a tax cut and extended federal protection for bank deposits can turn "no" voters in the House into supporters. On Monday, the House rejected the previous version of the plan by a 228-205 vote.

"It's still uncertain. I think it is likelier to pass than before," House Financial Services Committee Chairman Barney Frank said in an interview on CNN.

"The main change is reality. I think that it's not possible now to scoff at the predictions of doom if we don't do anything," the Massachusetts Democrat added.

Many Americans resent the idea that Wall Street is being "bailed out" at taxpayer expense, and have made their views clear in e-mails and calls to Washington, putting pressure in particular on vulnerable members of the House.

The crisis has become the biggest issue in forthcoming U.S. elections. Both presidential candidates, Republican Sen. John McCain and Democratic Sen. Barack Obama, voted for the package. Obama, echoing Republican Bush's warnings, said the bailout was vital to "prevent a crisis turning into a catastrophe."

All 435 House seats will be contested in the election on November 4. Thirty-five seats are up for grabs in the Senate.

But Britain's Nationwide building society said house prices in August tumbled 12.4 percent from a year earlier, their biggest annual drop since records began in 1991, as higher interbank lending rates fed into a sharp increase in mortgage rates.

Treasury Secretary Henry Paulson, whose original three-page proposal grew to hundreds of pages when Congress got involved, urged the House to act swiftly to ratify it.

Should the House approve the bill, it would go to Bush to be signed into law.

"This sends a positive signal that we stand ready to protect the U.S. economy by making sure that Americans have access to the credit that is needed to create jobs and keep businesses going," Paulson said.

A report in the Wall Street Journal said U.S. Federal Reserve officials are weighing cutting interest rates, even if Congress approves the bailout.

The tally for all the various rescue measures launched by U.S. authorities this year runs to about $1.8 trillion -- more than the total economic output of both Canada and Spain last year.

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