U.S. reaches outline for bailout deal

By Kevin Drawbaugh and Donna Smith

WASHINGTON (Reuters) - U.S. lawmakers on Sunday were set to sign off on a deal to create a $700 billion government fund to buy bad debt from ailing banks in a bid to stem a credit crisis threatening the global economy.

After marathon talks into the wee hours of Sunday morning, congressional leaders from both parties emerged with an agreement that altered key parts of a Wall Street bailout program initially proposed by the Bush administration.

The preceding week of negotiations over the rescue package roiled financial markets and altered the course of the U.S. presidential campaign less than six weeks before the election.

"We've made great progress," House of Representatives Speaker Nancy Pelosi told reporters after the talks.

Treasury Secretary Henry Paulson lobbied hard for the package -- the largest bailout in U.S. history -- saying it would keep credit markets from grinding to a halt under the burden of bad mortgage-backed bonds created by banks at a time when it looked like home prices had nowhere to go but up.

Congress was racing to reach an agreement before Asian financial markets open on Monday to avoid a repeat of last week's white-knuckle volatility. It was unclear when the House and the Senate would vote on the bailout legislation, or whether last-minute hitches might arise.

U.S. President George W. Bush spoke with Pelosi on Saturday evening and news of a deal was welcomed at the White House.

"We're pleased with the progress tonight and appreciate the bipartisan effort to stabilize our financial markets and protect our economy," White House spokesman Tony Fratto said.

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.

Amid public anger over the bailout, Democrats and Republicans rushed to add safeguards for taxpayers.

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, said a statement issued by Pelosi's office early on Sunday morning.

To further protect taxpayers, institutions selling assets under the plan would issue stock warrants giving "taxpayers an ownership stake and profit-making opportunities with participating companies," Pelosi's statement said.

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 companies could get multi-million-dollar severance pay -- known as golden parachutes -- while CEO pay that encourages excessive risk-taking would be limited.

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.