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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.
The program also calls for "meaningful judicial review of the Treasury secretary's actions," the statement said.
Finally, the government could use its power as the owner of mortgages and mortgage-backed securities to help more struggling homeowners modify the terms of their home loans.
Turbulent financial markets made the negotiations over the bailout more urgent, as big banks in recent weeks teetered, collapsed and refused to lend money to each other.
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.
Investors worried about a contagion effect as the crisis showed signs of spilling into Europe, where Belgian-Dutch financial group Fortis NV fired its interim chief executive after liquidity concerns pushed its shares to a 14-year low.
In London, regulators were in talks on the future of troubled lender Bradford & Bingley, raising the prospect that a second British bank could be nationalized.
The bailout deal capped a tumultuous week as news out of Washington made a deal look imminent at one moment, and then out of reach the next.
Lawmakers announced a deal in principle on Thursday, but conservative Republicans in the House balked, saying taxpayers should not be put on the hook for a private market failure.
Negotiations were thrown into further disarray as Republican presidential candidate John McCain suspended his campaign and rushed back to Washington, leading Democrats to charge that he was playing politics with the crisis.
Both McCain and Democratic nominee Barack Obama were in touch with congressional negotiators as talks hurtled toward a conclusion late on Saturday.
In the end, House Republicans won support for a provision that would create a privately funded insurance program for mortgage-backed securities, congressional aides said.
Democrats jettisoned proposals that would have put money into a trust fund for affordable housing and would have allowed judges to alter the terms of mortgages for bankrupt borrowers, according to aides.
Additional reporting by Richard Cowan, Deborah Charles, Dan Trotta and David Lawder; Writing by Kevin Krolicki