Bailout deal vote, market verdict awaited

WASHINGTON (Reuters) - U.S. lawmakers pushed to finalize a deal to create a $700 billion government fund to buy bad debt and halt the financial crisis as European regulators scrambled to prevent two banks from collapsing.

However, questions abound as to whether the U.S. financial rescue plan, which would use taxpayer funds to buy up toxic mortgage debt, would restore confidence to shaky markets and head off a deeper downturn.

In a sign of the spreading crisis, Belgian-Dutch financial group Fortis faced a takeover or break-up as European Central Bank President Jean-Claude Trichet joined emergency talks with Dutch and Belgian lawmakers.

In London, regulators were preparing to nationalize troubled mortgage lender Bradford & Bingley and were discussing a sale of its savings deposits and branches, people in the banking industry familiar with the matter said.

Meanwhile, congressional leaders from both parties emerged early on Sunday in Washington with a tentative agreement that altered key parts of a Wall Street bailout program initially proposed by the Bush administration.

But rank-and-file lawmakers had not seen the final version of the financial rescue plan and U.S. House of Representatives Republicans cautioned that they would not sign off on the plan until they were certain it would shift some costs to a new form of bad debt insurance funded by Wall Street.

A House debate on the bailout deal was set for Monday, leaving Asian markets to open the week with lingering uncertainty over the final form of a bailout that ranks as the largest in U.S. history.

Both U.S. presidential candidates offered qualified support for the bailout proposal, an issue that threatens to overshadow their campaigns with less than six weeks until the election.

"This is something that all of us will swallow hard and go forward with," Republican John McCain said in an interview with the ABC television network. "The option of doing nothing is simply not an acceptable option."

Democrat Barack Obama said he was likely to back the package. "My inclination is to support it," he told CBS television's "Face the Nation."

"We have to remember how we got here. Not so much to allocate blame, but to understand the choices that will face the next president," he added.

U.S. Treasury Secretary Henry Paulson lobbied hard for the package saying it would keep credit markets from grinding to a halt under the weight of bad mortgage-backed debt.

"I think we're there," Paulson said as he emerged with congressional leaders earlier on Sunday to announce a bargaining breakthrough that produced a framework for legislation.

At one point, lawmakers consulted by phone with billionaire investor Warren Buffett, who last week invested $5 billion in Goldman Sachs and warned that markets were in a "dangerous situation" and on the verge of breaking down.

PUBLIC ANGER SIMMERS

With many Americans are struggling to save their homes from foreclosure, lawmakers were bracing for a grassroots backlash against a bailout for the Wall Street banks, which many blame for creating the overheated housing market and bad loan crisis.

In the final hours of talks, Democrats and Republicans rushed to add safeguards for taxpayers and provisions that would allow the government to recover funds if housing prices recover and its holdings of bad debt gain value.

The proposed legislation would disburse the $700 billion in stages. The first $250 billion would be issued when the legislation is enacted, while another $100 billion could be spent if the president decided it was needed. The remaining $350 billion would be subject to congressional review.

Institutions selling assets under the plan would issue stock warrants to the government, a step intended to give taxpayers a chance to profit if markets recover.

The plan also would let the government buy troubled assets from pension plans, local governments and small banks.

In response to a clamor for limits on executive pay, no executives at participating firms could get multimillion-dollar severance packages -- known as golden parachutes.

An oversight board of top officials, including the Federal Reserve chairman, would supervise the program, while its management also would be under close scrutiny by Congress' investigative arm and an independent inspector general.

The government could also use its power as the owner of mortgages and mortgage-backed securities to help more struggling homeowners modify the terms of their home loans.

GLOBAL IMPACT

Global investors are worried about the potential for a domino effect of a financial crisis that began on Wall Street with the fallout from a slumping U.S. housing market.

China's Prime Minister Wen Jiabao sad in an interview with CNN that the turmoil was bound to have an impact on China and the rest of Asia. Wen said he hoped the U.S. government would stabilize its economy and finances quickly.

Dutch and Belgian media reported that BNP Paribas was a potential buyer for all of Fortis or Dutch bank ABN AMRO, which Fortis acquired as part of a consortium a year ago.

Meanwhile, international banking regulators converged on Amsterdam and scheduled a news briefing for Monday.

The decade-old Financial Stability Forum is a consortium of central bank officials and regulators from Europe, North America and Asia that came together in the wake of the 1997 Asian financial crisis with the goal of preventing a repeat.

U.S. regulators seized Washington Mutual Inc on Thursday in the biggest bank failure in U.S. history, selling its assets to JPMorgan Chase & Co. Washington Mutual filed for bankruptcy on Saturday with $8 billion in debt.

Meanwhile, published reports said Wachovia Corp, the sixth-largest U.S. bank, began merger talks with potential partners after a 27 percent drop in its shares on Friday.

The outline of bailout deal announced early Sunday capped a tumultuous week as news out of Washington made a deal look to be imminent and then suddenly out of reach.

Lawmakers had announced a deal in principle on Thursday, but conservative Republicans in the House of Representatives balked, saying taxpayers should not be put on the hook for a private market failure.

House Republicans ultimately won support for a provision that would create a privately funded insurance program for mortgage-backed securities, congressional aides said, while Democrats gave up a proposal that would have created a trust fund for affordable housing projects.

(Additional reporting by Deborah Charles, Dan Trotta and David Lawder; Writing by Kevin Krolicki; editing by Maureen Bavdek, Gary Crosse)