Financial Crisis: Questions Surround Bailout

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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 U.S. 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 next week.


Hopes for a speedy deal on the bailout plan, put together by U.S. 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 Sen. Richard Shelby said it must be changed to win his party's approval. The powerful Democratic chairman of the House Financial Services Committee, Rep. 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."

U.S. 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 American newspaper headlines 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 has never received so many calls and e-mails in her 10 years as a financial reporter.

An emergency White House meeting Thursday between Bush, congressional leaders, Republican presidential candidate Sen. John McCain and Democratic candidate Sen. 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.

U.S. Senate Banking Committee Chairman Christopher Dodd harshly criticized McCain for creating "political theater" to "rescue" his presidential campaign.

McCain has told Obama he does not want to attend the first of their televised presidential campaign debates set for Friday evening without a deal being reached on the bailout. Obama has insisted the debate go ahead.

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.

Washington Mutual saw its market value virtually wiped out overnight because of massive amounts of bad mortgages. Buyer JPMorgan said it would be business as usual Friday for WaMu's depositors and customers.

"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.

The 13-month-old credit crisis came to a head this month after the U.S. government's takeover of mortgage companies Fannie Mae (FNM.P: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.P: Quote, Profile, Research, Stock Buzz), the bailout of insurer American International Group Inc (AIG.N: Quote, Profile, Research, Stock Buzz), and the bankruptcy filing of investment bank Lehman Brothers Holdings Inc (LEHMQ.PK: Quote, Profile, Research, Stock Buzz).

(Reporting by Richard Cowan, Jackie Frank, Jeremy Pelofsky, Andrea Hopkins, Juan Lagorio, Jonathan Stempel, Richard Cowan and Ellis Mnyandu; Writing by Jason Neely and Jason Szep. Editing by Richard Hubbard, John Wallace and Jeffrey Benkoe)

This article was originally published on 2008-09-26
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