NEW YORK (Reuters) - The architects of a $700 billion bailout for the U.S. financial system tried to head off opposition to the plan in the U.S. Congress, while Japan’s largest brokerage agreed to buy Lehman Brothers’ European arm as the next step in the industry’s dramatic transformation.
Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson stressed the dire consequences of failing to move quickly on the plan for the government to buy up hundreds of billions of dollars of tainted mortgage-related securities.
U.S. stocks opened slightly higher, with the Dow Jones industrial average .DJI up 0.22 percent, following losses in European and Asian markets on uncertainty over what price the government will pay for the securities, when the buying would begin, and how confidence in the U.S. financial system can be restored.
“Action by Congress is urgently required to stabilize the situation and avert what could otherwise be very serious consequences for our financial markets and our economy,” Bernanke said in remarks prepared for delivery on Tuesday to the Senate Banking Committee.
He said global financial markets “remain under extraordinary stress.
Paulson said market turmoil was already spilling into the broader U.S. economy. “We must now take further, decisive action to fundamentally and comprehensively address the root cause of this turmoil,” he said.
Democrats are pushing back. Senate Banking Committee Chairman Christopher Dodd said lawmakers must limit executive pay for companies participating in the bailout or risk the wrath of voters. The bailout plan, he said, was “stunning and unprecedented in its scope and lack of detail”.
U.S. lawmakers and the Bush administration are trying to resolve differences over the legislation that would authorize the Treasury to buy $700 billion in bad assets and hold them until they could be sold at a later date.
On the Democrats’ wish list: assistance to homeowners struggling to pay their mortgages, curbs on executive pay at companies that use the program to unload toxic assets, and the government taking equity stakes in banks that use the program. Markets suspect the debate could drag into next week.
“I just don’t think the American public is sold,” said David Dietze, chief investment officer of Point View Financial Services in New Jersey. “I think they are skeptical of the need and they are fearful of the cost.”
Japanese firms are leading the rush to acquire U.S. investment banking assets. Nomura Holdings (8604.T) agreed to buy bankrupt Lehman Brothers’ equities and investment banking business in Europe and the Middle East, and said it expects to retain “a significant proportion” of the 2,500 staff employed in the businesses.
Previously, Japan’s top bank, Mitsubishi UFJ Financial Group Inc (8306.T), said it would buy up to 20 percent of Morgan Stanley (MS.N) for as much as $8.5 billion, and Nomura bought Lehman’s franchise in Japan and Australia, with some 3,000 employees.
Speculation is growing that Goldman Sachs (GS.N), which like Morgan Stanley is transforming itself into a commercial bank, might turn to Sumitomo Mitsui Financial Group (SMFG) (8316.T), Japan’s No. 3 bank, with which it has a long relationship.
“SMFG has always had very close ties with Goldman Sachs, so you can’t rule out some sort of a more comprehensive tie-up there,” said Jason Rogers, credit analyst at Barclays Capital.
Insurance giant American International Group Inc (AIG.N) should have a list of assets it wants to sell by next week, new Chief Executive Edward Liddy said. Canada’s Toronto-Dominion Bank (TD.TO) was among those weighing a bid for Washington Mutual Inc (WM.N), a source familiar with the situation said.
Singapore sovereign fund GIC said it still has plenty of cash after investing nearly $18 billion in UBS UBSN.VX and Citigroup (C.N) and would consider opportunities to invest in U.S. distressed assets.
Some analysts and investors harbor deepening doubts over whether Paulson and Bernanke can steer the world’s largest economy out of its worst crisis of confidence since the Great Depression of the 1930s.
“You two gentlemen have been wrong about the housing crisis, missed the leverage problem, and understated the derivative issue,” said Barry Ritholtz, director of research at Fusion IQ, an investment firm in New York. “Indeed, you two have been wrong about nearly everything since this crisis began years ago. Why should we trust your judgment on the largest bailout in American history?”
Banks remained wary of lending to each other. Overnight dollar borrowing rates remained almost one percentage point above the Federal Reserve’s 2 percent target.
Britain’s biggest home lender, HBOS HBOS.L, which sealed a takeover by UK bank Lloyds TSB (LLOY.L) last week, was down more than 10 percent after weak housing data sparked worries that its woes could linger despite the takeover.
“The risk has been transferred, it hasn’t gone away,” said Mike Trippitt, analyst at Oriel Securities.
Writing by Jason Szep; additional reporting by Jason Neely in London, Glenn Somerville, John Poirier and Donna Smith in Washington; editing by John Wallace