Published September 27, 2008

Markets flounder as talks on US bailout stall

Conservative Republicans propose alternative to Paulson's US$700b rescue plan

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(New York)
ANOTHER CASUALTY
Washington Mutual was shut down and its assets sold to JPMorgan Chase & Co

PRESSURE mounted on lawmakers yesterday to agree to a US$700 billion financial rescue plan after talks at the White House broke down in acrimony as the biggest bank closure in US history roiled global markets.

President George Bush said that 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 on Thursday shut bank Washington Mutual, selling its assets to JPMorgan Chase & Co. 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 US dollar borrowing rates remained high, particularly for three-month money.

'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 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.

'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.

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

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.

Hopes for a speedy deal on the bailout plan, put together by Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke, dimmed when a group of conservative Republican lawmakers proposed an alternative plan on Thursday. The Republican opposition to the plan reflects popular dissatisfaction with Wall Street bailout.

Voter opposition calls to congressional offices are 'running 50 per cent 'no' and 50 per cent 'hell, no',' said Democrat Paul Kanjorski.

Republican Senator Richard Shelby said Mr Paulson's plan must be changed to win his party's approval and that he was willing to delay approval of any bailout plan and let markets open next week without a relief package in place.

The powerful Democratic chairman of the House Financial Services Committee, Barney Frank, described the Republican plan as 'not serious'.

House Speaker Nancy Pelosi won't push through legislation backed by a Republican administration without Republican support, he said.

'If the House Republicans continue to reject the president's approach then there is no bill.' Reuters, Bloomberg