Wall Street bail-out goes to vote

The lower house of the US Congress is voting on a $700bn (£380bn) deal that aims to bail out Wall Street.

• President Bush has urged the House of Representatives to pass the bill – designed to end the credit crunch – and send a strong signal to the markets.
• He said the deal was a “bold” one which he was confident would restore strength and confidence to the US economy.
• However, he warned that the bail-out would not answer all economic woes and that some difficulties would remain.
• Speaking at the White House, President Bush said: “I’m confident that this rescue plan, along with other measures taken by the Treasury Department and the Federal Reserve, will begin to restore strength and stability to America’s financial system and overall economy.”
• But the agreement has done little to calm global stock markets, which have fallen sharply.
• Financial services firms were still in trouble, with Benelux giant Fortis bailed out by three governments and the UK’s Bradford & Bingley bank nationalised on Monday.
• “No one is taking any chances and we must wait until the vote to confirm [the bail-out deal] has passed,” said Joshua Raymond of City Index.
• The fiercest resistance to the bail-out came from Republican politicians in the House, who scuppered an earlier outline deal agreed last Thursday.
• Leaders of the US Senate are planning to put the the bail-out to a vote on Wednesday.
• If approved by the Senate and House, the revised plan will lead to the biggest intervention in the markets since the Great Depression in the 1930s.
• Political timetable
• Time is of the essence, not only to end the log-jam in financial markets, but also because of the election timetable in the United States.
• US Congress was supposed to go into recess last Friday, and with presidential and congressional elections in early November, politicians are keen to hit the campaign trail with a resolution to the crisis under their belt.
• The two candidates for the presidency, Democrat Barack Obama and Republican John McCain, gave their cautious support for the proposed legislation.
• The original bail-out package proposed by the US administration was deeply unpopular with many Americans.
• During a weekend of negotiations, numerous clauses were added to the Emergency Economic Stabilization Act of 2008, designed to reassure taxpayers.
• Nancy Pelosi, the Democratic Speaker of the House of Representatives, said the agreement was “not a bailout of Wall Street”, but designed to ensure pensions, savings and jobs would be safe.
• Democratic Senate leader Harry Reid said the deal was a big improvement on the initial proposal.
• “They wanted a blank cheque and we couldn’t give them one… Now we have to get the votes.”
• No golden parachutes
• The deal addresses several of the key concerns raised by both Democrats and Republicans:
• The government will get the money in tranches – $250bn straight away, and $100bn at the request of the White House; Congress can veto the release of the remaining $350bn
• Banks that accept bail-out money will have to hand over shares in return, which allows tax payers to benefit from the banks’ recovery
• Top bankers, meanwhile, will see their pay limited, and “golden parachutes” – huge payments when they leave the firm – will be banned
• The banking industry will have to help finance the bail-out if the money can not be recovered from the struggling banks themselves
• Four agencies will monitor the deal, including an independent Inspector General and a bipartisan oversight board
• Banks will be obliged to join an insurance programme to protect them against the losses of mortgage-backed securities
• The proposed legislation was now “frozen”, said Ms Pelosi, which means critics can not strike out individual provisions that they do not like.
• However, several key critics of the deal called on their fellow legislators to block it.
• Financial woes
• The Bush administration submitted its initial proposal after several financial institutions got into trouble – unable to free up the money to keep their daily business going.
• The liquidity problems have not been limited to the US.
• In the UK mortgage lender Bradford & Bingley was nationalised on Monday morning, with the savings part of the business to be sold to Spanish banking group Santander
• The governments of Belgium, Luxembourg and the Netherlands agreed to invest 11.2bn euro in huge financial services group Fortis, in effect nationalising it.
• Last week, in what was the largest US banking failure, Washington Mutual was taken over by regulators and sold on to JPMorgan Chase
• Lehman Brothers collapsed, Merrill Lynch sought refuge in a takeover by Bank of America, and Morgan Stanley secured a large capital injection from a Japanese rival
• US insurance giant AIG had to be bailed out by the US government, which in effect took an 80% stake in the firm, while mortgage giants Freddie Mac and Fannie Mae were nationalised.