Published October 3, 2008

Bailout plan sails through Senate - but here comes the hard part

Markets expected to be in nervous limbo until House clears bill on Friday

By ANDREW MARKS
NEW YORK CORRESPONDENT
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WALL STREET is bracing itself for another ride on the see-saw of hope and fear even though the US Senate has on Wednesday overwhelmingly approved a US$700 billion bailout for the financial system.

Ending the uncertainty over how the federal legislature will respond to the crisis would be a big shot in the arm for investors who have seen the stock market panic on a scale not seen since 1987, said stock market analysts.

'But no one's going to be singing in the streets today,' said John O'Donoghue, chief equity trader at S G Cowen. 'If the House approves the deal, there will be a sigh of relief, but it's been more than a week that we've had to digest the possibility of this rescue plan, and nobody believes that it's going to solve this crisis all by itself,' he said.

On Wednesday night the Senate approved a bill similar to the one voted down by the House of Representatives on Monday, but with several amendments that make it more appealing to House members who rejected the first one. This is read as the latest sign that Washington is finally getting in line with Wall Street on the severity of the financial crisis and the urgency of taking measures to prevent an outright collapse of the frozen credit market.

The revised bill before the Senate includes a temporary increase in the Federal Deposit Insurance Corp's insurance on bank deposits to US$250,000 from $100,000. The bill also extends existing tax breaks for individuals and businesses for two years.



The bill also will temporarily let the FDIC borrow unlimited funds from the Treasury to further bolster its insurance of US bank deposits. Such a move could help alleviate strains on banks, as depositors have increasingly reduced deposit levels to the current US$100,000 FDIC insurance limit.

But the US stock market reacted with nervous scepticism in early trading yesterday morning, perhaps unsettled by the indecisive back and forth of the government's moves to buy the banks' worst assets and unfreeze the credit markets.

Shortly after the opening bell, all the major indices were moderately lower. The Dow Industrials, for example, was down 154 points, or 1.5 per cent, at 10,677. By noon, the Dow Industrials had slipped further, to 10,602.56, and the Nasdaq Composite was down 52.92 points at 2,016.48.

Commenting on the Senate action, Art Hogan, chief investment strategist at Jeffries & Company, said: 'This should be a positive for the stock market. But we've been down this road before and no one's going to be celebrating until the rescue is a done deal.

'The Senate vote is meaningless unless until Wall Street sees the House of Representatives getting on board and voting for the rescue plan too.'

And that final and crucial element is unlikely to happen before Friday, when the House of Representatives is scheduled to vote on the new version of the bill.

In the meantime, market watchers are expecting another day of high volatility and reversals, as was the case on Wednesday, when the blue chip index sank as much as 200 points before rallying to finish the day just 19.59 points down, or 0.2 per cent, to 10,831.07. The S&P 500 lost 5.3 points, or 0.5 per cent, to close at 1,161.06, while the Nasdaq was Wednesday's biggest loser with a fall of 22.48 points, or 1.1 per cent, to 2,069.4.

Further weighing on stocks was the latest sign of how heavily the credit crisis is hurting the economy, as the government reported that the number of people seeking unemployment benefits rose last week to 497,000, a seven-year high.

If it's any consolation to the market, Swiss bank UBS has announced it would net a small third-quarter profit after four consecutive quarters of big losses and massive write-downs.

But until the House of Representatives votes on Friday, said Mr Hogan, 'the only thing Wall Street is interested in is what happens in Washington.'