Congress heads to weekend with no bailout

NEW YORK (Reuters) - The biggest bank failure in U.S. history and nose diving banking stocks added pressure on the U.S. Congress to agree to a $700 billion financial rescue plan to breathe life back into credit markets.

After days of talks had collapsed in acrimony and roiled global markets, President George W. Bush expressed optimism that Congress and the White House would come together on the proposal.

As Republican and Democratic lawmakers clashed over the plan, and as U.S. Treasury Secretary Henry Paulson huddled in talks on Capitol Hill, global financial turmoil deepened.

Shortly after U.S. stocks closed higher in hopes of a bailout deal before markets open on Monday morning, U.S. House Speaker Nancy Pelosi promised that Congress would work through the weekend and said progress was being made.

"The markets need a message from us ... that we understand time is important," Pelosi told reporters.

Just before Wall Street trading closed, The New York Times said Wachovia Corp, the No. 6 U.S. bank, was in early talks with Citigroup, but no deal may emerge.

Stock in Wachovia, the sixth-largest U.S. bank, tumbled 36 percent on Friday before closing 27 percent lower on the possible deal. A subsequent report said several other banks were considering buying Wachovia.

Midwest regional bank National City Corp skidded 29 percent and California's Downey Financial Corp tumbled almost 48 percent amid a rising tide of home foreclosures and loan defaults that has spawned the worst financial crisis since the Great Depression.

In Europe, Belgian-Dutch financial group Fortis NV denied it had a liquidity problem after its shares tumbled more than 20 percent to a 14-year low. Later, Fortis sacked its interim chief executive.

U.S. regulators seized savings and loan Washington Mutual Inc late Thursday, the biggest ever U.S. bank failure, and sold its assets to JPMorgan Chase & Co.

Banks worldwide hoarded cash and showed a growing reluctance to lend, driving rates that institutions charge each other on loans to a record high in London.

"What you're going to see is the strong stronger, and the weak are going to die off," said William Smith, president of Smith Asset Management in New York.

Global money markets dried up, forcing increased injections of cash from central banks. And with no relief in sight, investors flocked to the safety of cash and U.S. government securities.

The view of many experts was that Congress had better reach a deal before the stock market's opening bell rings on Monday morning or there will be carnage on Wall Street.

"Wall Street is banking on a definitive agreement in place before markets open on Monday," said Fred Dickson, director of retail research at D.A. Davidson & Co in Lake Oswego, Oregon.

"The plan is crucial to keeping the economy afloat."

Pelosi sought to reassure markets, saying talks were back on track. "We will not leave until legislation has passed that will be signed by the president."

House Majority Leader Steny Hoyer blamed the crisis on Republicans. "President Bush, John McCain, and their Republican allies ... failed to enforce laws against irresponsible mortgage lending, helping the housing bubble swell," he said in prepared remarks released ahead of Saturday's broadcast.

U.S. Sen. Charles Schumer said there was an "impasse" and offered to add a mortgage insurance measure to the bailout.

"If this will bring the House Republicans to the table, we're willing to put it in the package and let's see if the Treasury Secretary wants to use it and if it would work," the New York Democrat said on CNBC.

Conservative Republicans have called for the government to offer insurance coverage for the roughly half of all mortgage-backed securities that it does not already insure.

The $700 billion bailout, the largest of its kind in U.S. history and more costly than the Iraq war, aims to remove soured assets from the books of fragile banks and revive frozen credit markets. The value of the assets, mostly mortgage-related, tumbled as the U.S. housing market slumped.

Even with a deal, the U.S. economy faces serious problems -- sluggish growth and rapidly falling home prices.

Further U.S. interest rate cuts may not help, said James Bullard, the president of the St. Louis Federal Reserve Bank. "The consequences of this turmoil on real economic performance entail clear downside risk," he said.

Adding to the anxiety, reports showed U.S. economic growth was weakening and consumer confidence diving.

Citing the crisis, Europe's biggest bank, HSBC Holdings Plc, said it was cutting 1,100 jobs, adding to more than 80,000 job losses across the banking landscape in the past 18 months.

Friday's U.S. stock gains came at the end of a week which was still the worst for the benchmark S&P 500 since May.

"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, director of currency research at GFT Forex in New York.

The crisis reverberated in the world's ports as banks ceased lending, leaving some cargo stranded on docks and slowing trade, the top executive of a Greek shipping company Excel Maritime Carriers Ltd said.

Gold prices rose as investors sought safety in bullion. The precious metal is up about 20 percent since September 11, when investment banking titan Lehman Brothers Holdings Inc's stock price collapsed, raising questions about the global banking system.

QUESTIONS SURROUND BAILOUT

Hopes for a speedy deal on the plan, crafted by Paulson and Federal Reserve Chairman Ben Bernanke, had faded after a group of conservative Republican lawmakers proposed a radical alternative that provides for no government money up front.

House Minority Leader John Boehner said a majority of his fellow Republicans may not go along with a bipartisan proposal favored by Democrats unless their alternative is given serious consideration.

Senate Majority Leader Harry Reid complained that presidential politics had hurt the talks.

Although Democrats control Congress, they are hesitant to pass a bailout bill without rank-and-file Republican support because it could leave their party politically exposed just weeks before the November 4 presidential and congressional elections.

The 13-month-old credit crisis came to a head this month after the U.S. government's takeover of mortgage companies Fannie Mae and Freddie Mac, the bailout of insurer American International Group Inc, as well as the bankruptcy filing by Lehman Brothers.

(Reporting by Tabassum Zakaria, Nick Carey, Donna Smith, Jeremy Pelofsky, Andrea Hopkins, Juan Lagorio, Jonathan Stempel, Richard Cowan and Ellis Mnyandu; Writing by Jason Szep; Editing by John Wallace, Jeffrey Benkoe, Leslie Gevirtz)