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US waits on financial rescue package

The biggest bank failure in United States history and nose-diving banking stocks added pressure on the US Congress to agree this weekend to a $700-billion financial industry rescue to breathe life back into credit markets.

The bail-out dominated barbed early exchanges on Friday evening in the first presidential debate between Republican John McCain and Democrat Barack Obama in the run-up to the November 4 election.

A second day of intense negotiations between rancorous Democrats and Republicans in Congress failed to produce accord on how to structure a deal allowing the government to buy up soured assets that are choking credit.

But congressional leaders promised to stay all weekend until a compromise was reached, and US stocks ended mostly higher as big bank shares staged a rally on hopes that lawmakers would hammer out a deal.

Talks on Thursday had collapsed in acrimony. But President George Bush expressed optimism on Friday that Congress and the White House would come together on the proposal.

Still, as US Treasury Secretary Henry Paulson huddled with lawmakers, global financial turmoil deepened.

US House of Representatives Speaker Nancy Pelosi promised that Congress would work through the weekend.

”I believe that progress has been made,” she said. ”We will not leave until legislation is passed. We will be working through the weekend to achieve that end.”

During Friday evening’s presidential debate, both candidates said the scale of the rescue plan would force the next president to make tough choices and pare back government spending.

Obama said America’s biggest economic crisis since the Great Depression of the 1930s was the ”final verdict on eight years of failed economic policy promoted by [President] George Bush and supported by Senator McCain”.

Both candidates expressed hope there would be a deal soon.

McCain said he favoured a plan where the government would give loans to failing financial institutions rather than buy their soured assets, such as bad mortgages.

Bank stocks tumble
Just before Wall Street trading closed, the New York Times said Wachovia Corporation, the sixth largest US bank, was in early talks with Citigroup, but no deal may emerge.

Stock in Wachovia tumbled 36% on Friday before closing 27% lower on the possible deal. A subsequent report said several other banks were considering buying Wachovia.

Midwest regional bank National City skidded 29% and California’s Downey Financial Corporation tumbled almost 48% amid a rising tide of home foreclosures and loan defaults that has spawned the worst financial crisis since the Great Depression.

In Europe, Belgian-Dutch financial group Fortis NV denied it had a liquidity problem after its shares tumbled more than 20 % to a 14-year low. Later, Fortis sacked its interim chief executive.

US regulators seized savings and loan Washington Mutual late on Thursday, the biggest-ever US bank failure, and sold its assets to JPMorgan Chase.

Banks worldwide hoarded cash and showed a growing reluctance to lend, driving rates that institutions 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.

”Wall Street is banking on a definitive agreement in place before markets open on Monday,” said Fred Dickson, director of retail research at DA Davidson in Lake Oswego, Oregon.

”The plan is crucial to keeping the economy afloat.”

Powerful Democratic United States Senator Charles Schumer of New York offered to add a mortgage insurance measure to the bail-out to resolve the impasse.

Conservative Republicans have called for the government to offer insurance coverage for the roughly half of all mortgage-backed securities that it does not already insure.

The $700-billion bail-out, the largest of its kind in US history and more costly than the Iraq War, 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.

Adding to the anxiety, reports showed US economic growth was weakening and consumer confidence diving.

Citing the crisis, Europe’s biggest bank, HSBC Holdings, said it was cutting 1 100 jobs, adding to more than 80 000 job losses across the banking landscape in the past 18 months.

Questions surround bail-out
Hopes for a speedy deal on the plan, crafted by Paulson and Federal Reserve chairperson Ben Bernanke and presented to Congress last weekend, had faded after a group of conservative Republican lawmakers proposed a radical alternative that provides for no government money up front.

House Minority Leader John Boehner of Ohio said most of his fellow Republicans may not go along with a bipartisan proposal favoured by Democrats unless their alternative is considered.

Although Democrats control Congress, they are hesitant to pass a bail-out Bill without rank-and-file Republican support because it could leave their party politically exposed just weeks before the presidential and congressional elections.

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 bail-out of insurer American International Group, as well as the bankruptcy filing by Lehman Brothers. — Reuters

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