Bush scrambles to save $700b bailout plan

New York, London: Pressure mounted on lawmakers on Friday to agree a $700 billion financial rescue plan after talks at the White House broke down in acrimony and the biggest bank closure in US history roiled global markets.

President George W. Bush said while there were disagreements on parts of the bailout plan, legislation would be passed by Congress. "We are going to get a package passed," he said in a brief appearance at the White House.

US authorities shut bank Washington Mutual Inc. on Thursday, selling its assets to JPMorgan Chase & Co. In Europe, Belgian-Dutch financial group Fortis NV denied it had a liquidity problem after its shares fell for a fifth straight day.

Banks worldwide hoarded cash and demonstrated a growing reluctance to lend, driving rates that institutions charge to each other on loans to a record high in London on mounting uncertainty over what would be the largest financial bailout in US history.

Global money markets dried up, forcing increased injections of cash from central banks as dollar borrowing rates remained high, particularly for three-month money. The market stress was aggravated by the looming quarter-end this week.

"The markets are just caught like a deer in the headlights, watching Washington, trying to figure out what the next step is," said Boris Schlossberg, director of currency research at GFT Forex in New York.

Fallout from the crisis battered shares of Wachovia Corp, the sixth-biggest US bank, which fell as much as 26 per cent. KeyCorp, a large Midwest bank, slid nearly seven per cent.

"I'm afraid that the real economy is unravelling very quickly," said Nigel Gault, chief US economist at Global Insight Inc, Lexington, Massachusetts:

Europe's biggest bank, HSBC Holdings Plc, said it was cutting 1,100 jobs, citing the credit crisis.

Losses

With negotiations in Washington descending into clashes between Republicans and Democrats, US stocks prices fell more than one per cent, shadowing losses in Asia and Europe. Government bond yields fell as investors sought safe havens.

"The negotiations over the bailout are sapping the enthusiasm that people could have for the market," said Rick Meckler, president of investment firm LibertyView Capital Management in New York.

Fortis' stock fell nearly 10 per cent on investor concerns about its liquidity, which its president said was not a problem. Banking woes extended to China, where shareholder Ping An Insurance sank 9.7 per cent.

Hopes for a speedy deal on the bailout plan, put together by US Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, dimmed when a group of conservative Republican lawmakers proposed an alternative plan on Thursday.

Republican Senator Richard Shelby said it must be changed to win his party's approval. The powerful Democratic chairman of the House Financial Services Committee, Representative Barney Frank, countered that passage depends on Republicans.

Asked in a television interview whether it would be approved by the end of the week, Shelby replied, "We could, but I think we'll have to change the structure some."

US House Speaker Nancy Pelosi said she expects lawmakers to reach a deal on the bailout because "it has to happen", and that she hoped for agreement in the next 24 hours so that the House and Senate could act on legislation this weekend.

Although Democrats control Congress, they are hesitant to pass a bailout bill without rank-and-file Republican support because of the risk of leaving their party politically exposed in an election season.

The heated debate comes just weeks before the November 4 presidential and congressional elections in which many lawmakers are trying to retain their seats.

The group of conservative lawmakers floated an alternative plan calling for the government to offer insurance coverage for the roughly half of all mortgage-backed securities that it does not already insure.

Lawmakers critical of the Paulson deal say they fear that freewheeling bankers will get off too lightly and doubt it can solve the wider crisis - a concern echoed by many voters.

With US newspapers screaming about bankrupt banks and insurers, financial advisers - especially those in the public eye - are being swamped.

"There's a feeling of helplessness that nobody seems to have the answers," said Teresa Dixon Murray, who writes a weekly column about personal finance at the Cleveland Plain Dealer newspaper. She said she had never received so many calls and e-mails in her ten years as a financial reporter.

Shouting match

An emergency White House meeting on Thursday between Bush, congressional leaders, Republican presidential candidate Senator John McCain and Democratic candidate Senator Barack Obama "devolved into a contentious shouting match", according to a statement from the campaign of McCain, who was accused by some of stalling the process.

US Senate Banking Committee Chairman Christopher Dodd harshly criticised McCain for creating "political theatre" to "rescue" his campaign.

Lawmakers face what could be the most serious financial crisis since the Great Depression of the 1930s, with the $700 billion price tag bigger than the cost of the Iraq war and topping all International Monetary Fund lending since its inception after World War II.

"What you're going to see is the strong stronger, and the weak are going to die off," William Smith, president of Smith Asset Management in New York, said of American banks.