Lawmakers Near Bailout Deal Economy Stumbles

 
 
By Reuters -  |  Posted 2008-09-25
 
 
 

NEW YORK (Reuters) - U.S. lawmakers neared agreement on a massive Wall Street bailout plan on Thursday with more protections for taxpayers, giving world stock prices a boost even as data showed the U.S. economy slowing.

Lawmakers hope to reach a bipartisan consensus on a proposed $700 billion rescue for U.S. financial firms in time for a meeting at the White House Thursday afternoon.

"The idea of a rescue plan has gotten a public airing. Now it's time for both sides to roll up their sleeves, get together in a room and hash this out once and for all," Charles Schumer, the New York Democrat who chairs the congressional Joint Economic Committee, said in a written statement.

U.S. Treasury Secretary Henry Paulson was expected to work the phones to try to reach a deal with Congress and was closely monitoring the situation in stressed credit markets, where bank-to-bank dollar borrowing rates jumped sharply.

After lawmakers meet behind closed doors, President George W. Bush will bring presidential candidates Barack Obama and John McCain into the negotiations at an emergency White House meeting with Democratic and Republican congressional leaders.

The frenzy of meetings in Washington follows signs of fresh trouble in the world's biggest economy. Orders for U.S. manufactured goods plunged in August, and the number of workers filing new claims for jobless benefits shot up, according to government reports that showed the economy rapidly weakening.

Top U.S. industrial conglomerate General Electric Co (GE.N: Quote, Profile, Research, Stock Buzz) issued a rare profit warning, citing "unprecedented weakness and volatility" in the financial services market.

Central banks have pumped billions of dollars into financial markets to try to ease the credit crunch.

Just weeks before Americans go to the polls to elect their next president, critics have expressed concern that a bailout will let freewheeling bankers get off too lightly, and doubts have surfaced over whether the plan can solve the wider credit crisis.

The Bush administration hopes the bailout can restore liquidity to the market and revive the foundering U.S. economy. The $700 billion would be used to buy up toxic mortgage-related securities held by financial firms. The U.S. housing market slump has sent the value of those securities plummeting.

Treasury spokeswoman Brookly McLaughlin said discussions with lawmakers are "ongoing" and declined to comment on statements from Schumer and House of Representatives Majority Leader Steny Hoyer that a deal could be reached today.

Signs of a possible breakthrough on the rescue package, which aims to stave off a widespread financial meltdown, gave beleaguered U.S. stocks a boost.

STOCK RISE

U.S. stock prices rose at the open, while the data on the weakening U.S. economy knocked down the dollar against the yen and euro.

"Not looking too good at all," said George Davis, chief technical analyst at RBC Capital Markets in Toronto. "Obviously the data reinforces the slowdown in the U.S. economy and it is likely to generate some short-term U.S. dollar weakness."

Traders cited gnawing concern that even if Congress approves a bailout, it may lack the muscle to save the world's largest economy from recession or a steep economic tumble, potentially squeezing a slowing world economy.

"The U.S. may be closer to reaching a deal to approve the bailout, but there is still a lot of uncertainty on its overall impact on the economy," said Mark Pervan, a senior commodity strategist at Australia and New Zealand Banking Group Ltd.

Gold was higher as investors sought safety in bullion. The metal is up about 20 percent since September 11, when a collapse in shares of Lehman Brothers raised questions about the global banking system.

German Finance Minister Peer Steinbrueck said one outcome of the crisis would be a less dominant role for the United States in the global financial system. "The United States will lose its superpower status in the world financial system. The world financial system will become more multi-polar," he said.

He joined a growing chorus of international politicians who have blamed the United States for spawning the global financial crisis with a blind drive for higher profits and insufficient market regulation.

Bush has offered few details about the emerging bailout but used a prime-time address Wednesday night to warn Americans of "a long and painful recession" if Congress fails to act swiftly to fund a rescue that would cost more than the Iraq war.

In his first prime-time speech devoted exclusively to the economy, Bush told Americans there was little choice but to undertake the bailout, which could cost every man, woman and child in America $2,300.

"I believe companies that make bad decisions should be allowed to go out of business. Under normal circumstances, I would have followed this course. But these are not normal circumstances," Bush said.

"The market is not functioning properly. There has been a widespread loss of confidence, and major sectors of America's financial system are at risk of shutting down."

Struggling automakers General Motors Corp (GM.N: Quote, Profile, Research, Stock Buzz), Ford Motor Co (F.N: Quote, Profile, Research, Stock Buzz), and Chrysler LLC, hurt by tight credit markets, won House of Representatives backing on Wednesday for guarantees needed to fund a $25 billion loan package.

McCain, the Republican presidential nominee, has asked to cancel a debate with Obama, the Democratic nominee, set for Friday, citing the need to work on the bailout.

Obama said the first of a series of planned debates should go ahead: "What is important is that we don't suddenly infuse Capitol Hill with presidential politics."

(Additional reporting by Wanfeng Zhou and Nick Olivari in New York, Richard Cowan, Alister Bull and David Lawder in Washington, and Noah Barkin in Berlin; editing by John Wallace)