October 2, 2008 / 12:06 AM / 11 years ago

Senate endorses bailout, uncertainty remains

HONG KONG/LONDON (Reuters) - The U.S. Senate endorsed a revised $700 billion plan to tackle a financial crisis that has shaken world markets and drawn warnings of approaching economic catastrophe.

The floor of the Senate chamber is pictured in this video grab after senators voted on the Dodd (Senate Banking Committee Chairman Chris Dodd, (D-CT) amendment to the $700 billion financial rescue package on Capitol Hill in Washington October 1, 2008. REUTERS/U.S. Senate TV/Handout

The plan now faces a final hurdle in the House of Representatives, which rocked global markets this week by rejecting an earlier version. President George W. Bush, speaking after Wednesday night’s 74-25 Senate vote, called the bailout “essential to the financial security of every American”.

But the crisis, beginning with a collapse in the U.S. housing market and spreading to major financial institutions, has reverberated beyond American shores, hitting European banks and spurring moves there to formulate a similar support plan.

U.S. figures showing plunging U.S. auto sales, led by a 34 percent slide at Ford Motor Co, added to evidence the crisis was spreading now to the “real economy”, threatening industry, smaller businesses and jobs.

The bailout plan, equivalent to some $2,300 per American, is intended to reinvigorate worldwide credit markets and interbank lending that had frozen up while overleveraged financial institutions staggered under the weight of failed mortgages.

It involves the Treasury taking “toxic” or bad loans off the hands of institutions.

But market participants warned that the rescue package is not a cure-all, with a worsening economic outlook spurring calls for central banks to cut interest rates.

“Even if the bill is passed, worries remain over the global economic outlook so financial markets are unlikely to stabilize,” said Masamichi Adachi, senior economist at JPMorgan in Tokyo.

“It’s a completely different world now. All the things U.S. authorities are doing now are simply aimed at preventing a global meltdown.”

Stocks in Asia were lower on Thursday on recession fears, and European stocks opened flat. Treasuries rose and the dollar gave up early gains.

The House of Representatives will probably vote on Friday.

President Bush praised Senate passage of the package and urged the House to quickly do the same.

“With the improvements the Senate has made, I believe members of both parties in the House can support this legislation,” Bush said in a written statement.


Leaders in the U.S. House of Representatives expressed cautious optimism that the legislation would be approved.

Senate leaders hope that sweetening the plan with a tax cut and extended federal protection for bank deposits can turn “no” voters into supporters. On Monday, the House rejected the previous version of the plan by a 228-205 vote.

“It’s still uncertain. I think it is likelier to pass than before,” House Financial Services Committee Chairman Barney Frank said in an interview on CNN.

“The main change is reality. I think that it’s not possible now to scoff at the predictions of doom if we don’t do anything,” the Massachusetts Democrat added.

Many Americans resent the idea that Wall Street is being “bailed out” at taxpayer expense, and have made their views clear in emails and calls to Washington, putting pressure in particular on vulnerable members of the House.

All 435 House seats will be contested in the election on November 4, as opposed to 35 seats up for grabs in the Senate.

Treasury Secretary Henry Paulson, whose original three-page proposal grew to hundreds of pages when Congress got involved, urged the House to act swiftly to ratify it.

Should the House uphold the bill, it would go to the White House for signature into law by President Bush.

“This sends a positive signal that we stand ready to protect the U.S. economy by making sure that Americans have access to the credit that is needed to create jobs and keep businesses going,” Paulson said.

The financial crisis has become the biggest issue in the forthcoming U.S. elections, and both presidential candidates, Republican Sen. John McCain and Democratic Sen. Barack Obama, voted for the package.

Slideshow (14 Images)

Stocks in Tokyo dropped 1.9 percent on Thursday, while MSCI’s share index for the rest of Asia lost 1.2 percent. Oil gained $1 a barrel.

“If the massive expansion of the Fed’s balance sheet and other CB (central bank) liquidity injections cannot do the trick then coordinated global rate cuts becomes likely and necessary,” Michael Hartnett, chief emerging markets equity strategist at Merrill Lynch, wrote in a note.

In Europe, France and Germany clashed over the idea of a U.S.-style financial rescue fund for Europe amid further signs of contagion from the global credit crisis.

Writing by Tony Munroe and Ralph Boulton; Editing by Jean Yoon

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