Congress passes bailout, focus shifts to fallout

By Eddie Evans and Kevin Krolicki

NEW YORK/WASHINGTON (Reuters) - The U.S. government enacted a landmark $700 billion bank bailout on Friday, but investors questioned whether it could contain a panic that began on Wall Street and spread to become a global financial crisis.

The U.S. House of Representatives approved the rescue plan by a vote of 263-171 on Friday. That sent the measure to President George W. Bush, who quickly signed it into law, concluding two weeks of high-stakes haggling over the plan that had roiled and captivated global markets.

Markets pivoted on passage of the U.S. bailout, as investors' attention turned to signs of a gathering recession.

Stocks, which had been higher before the vote, dropped, with the S&P 500 index closing at its lowest level in almost four years. The dollar was also in retreat.

"This probably comes a bit too late. If this had been done earlier, it probably would have had a much bigger impact in restoring confidence," said Anna Piretti, economist at BNP Paribas in New York.

U.S. Treasury Secretary Henry Paulson, who had been the administration's chief lobbyist for the plan, said he would move quickly to buy up distressed assets from banks.

"We have shown the world that the United States of America will stabilize our financial markets and maintain a leading role in the global economy," Bush said in a short statement delivered before cameras outside the White House.

Analysts cautioned it was still unclear whether the U.S. plan would work as advertised.

"There are more questions than answers out there still," said David Kelly, chief market strategist of JPMorgan Asset Management. "Even if the banks do participate, how willing will they be to make new loans into the economy if they can get rid of the bad ones?"

The U.S. government has run up a bill of $1 trillion in recent weeks as it rushed to stabilize its banks, including the seizures of Fannie Mae and Freddie Mac. That cost is equal to over 7 percent of the world's largest economy.

Earlier on Friday, the hobbled financial sector was bolstered as Wells Fargo & Co stepped in to buy Wachovia Corp in a deal that would take the place of a shotgun merger with Citigroup Inc brokered by U.S. banking regulators.

But in signs of the spreading crisis, California said it was running out of money, France said the world stood on the "edge of the abyss" and European leaders divided over their response to the banking sector's difficulties.

HOUSE FALLS INTO PLACE

The House had shocked world markets on Monday by rejecting a previous draft. With elections a month away, lawmakers from both parties were wary of voter backlash in asking taxpayers to pay for Wall Street's mistakes.

Earlier on Friday, the United States reported its biggest monthly job loss in 5-1/2 years, more evidence of an approaching recession. Data showed the U.S. services sector holding up.