U.S. lawmakers prepared to vote on Monday on a $700 billion government fund to buy bad debt as the global financial crisis kept markets on tenterhooks by forcing European authorities to rescue troubled banks.
As investors around the world hung on every twist and turn in Washington, Belgian-Dutch group Fortis was nationalised and British mortgage lender Bradford & Bingley faced the same fate.
Fortis is the first major European bank to buckle under the financial turmoil triggered in August last year by U.S. mortgage defaults, and an early relief rally in markets at news of progress in Washington soon fizzled out.
Stock markets in Japan, South Korea and Hong Kong all retreated 1-2 percent, giving up initial gains led by financial shares. U.S. stock futures pointed to a drop at the opening bell as did European stock futures
The dollar climbed, mainly due to the euro and pound sliding about 1 percent as the toll on financial firms spread across the Atlantic and stirred expectations that central banks may have to respond by cutting interest rates.
"It's definitely moving towards Europe," said Joseph Kraft, head of Japan capital markets at Dresdner Kleinwort. "It's the beginning of the end and a necessary step, so we should see more institutions nationalised, absorbed or going into default."
The latest upheaval will only worsen the severe strains in money markets as financial firms have all but stopped lending to each other, partly as they prepare to close their books on the third quarter on Tuesday, analysts said.
In the United States, House Republicans were the main obstacle to passage of the bailout bill as they balked at spending so much public money just before elections in November.
But senior Republican Sen. Judd Gregg of New Hampshire threw his weight behind the deal, saying he expected the House to vote on the bill on Monday.
Senate Majority Leader Harry Reid said the Senate could take up the bill by Wednesday.
U.S. Treasury Secretary Henry Paulson said he was confident the programme will be enough to unclog jammed financial markets.
Congressional leaders from both parties said they had a tentative agreement on Sunday.
But questions abound as to whether the U.S. financial rescue plan, which would use taxpayer funds to buy up bad mortgage debt, would restore confidence to shaky markets and head off a deeper economic downturn.
"We will be given nitroglycerin to prevent a heart attack and get some colour back in our face," said Sung Won Sohn, professor of economics at California State University.
EUROPEAN BANK RESCUES
In a sign the credit crisis was spreading, the Belgian, Dutch and Luxembourg governments nationalised financial group Fortis after European Central Bank President Jean-Claude Trichet held emergency talks with government officials over the fate of one of Europe's top 20 banks.
The governments agreed to inject 11.2 billion euros ($16.4 billion) into the banking and insurance company, which has 85,000 staff worldwide.
In London, regulators were also preparing to nationalise troubled mortgage lender Bradford & Bingley and Spanish bank Santander was in talks to buy its retail deposits and branch network.
In Germany, Hypo Real Estate struck a last-minute deal with a consortium of banks to resolve a financing squeeze, saying the credit facility was sufficient to cover its capital needs well into the future.
"Now investors may say 'Gee, even though a bill may get passed in the U.S. … can the Europeans move as quickly? Do they understand the problem?'" said David Dietze, chief investment strategist at Point View Financial Services in New Jersey.
The U.S. banking system also faced more upheaval. Wachovia Corp is in talks with rivals to be taken over, sources familiar with the situation said on Sunday.
Citigroup Inc is among the parties in talks with Wachovia, the two sources said, and one source said Wells Fargo & Co was also in discussions.
QUALIFIED BIPARTISAN SUPPORT
U.S. congressional leaders from both parties emerged early on Sunday with a tentative agreement that altered key parts of a Wall Street bailout programme initially proposed by the Bush administration.
Both U.S. presidential candidates, Republican John McCain and Democrat Barack Obama, offered qualified support for the bailout proposal, an issue that threatens to overshadow their campaigns with less than six weeks until the election.
With many Americans struggling to save their homes from foreclosure, lawmakers were bracing for a grassroots backlash against a bailout for Wall Street banks, which contributed to the U.S. housing bubble with reckless lending.
In the final hours of talks, Democrats and Republicans rushed to add safeguards for taxpayers and provisions that would allow the government to recover funds if house prices recover and its holdings of bad debt gain value.
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.
Institutions selling assets under the plan would issue stock warrants to the government, a step intended to give taxpayers a chance to profit if markets recover.
The plan would also let the government buy troubled assets from pension plans, local governments and small banks.
In response to a clamour for limits on executive pay, no executives at participating firms could get multimillion-dollar severance packages — known as golden parachutes.
An oversight board of top officials, including the Federal Reserve chairman, would supervise the programme. Its management would also be under the scrutiny of Congress' investigative arm and an independent inspector general.
The government could also use its power as the owner of mortgages and mortgage-backed securities to help more struggling homeowners modify the terms of their home loans.
"Passage of the plan is just step one. Step two is execution, and there remains considerable uncertainty about how assets will be purchased," said Michael Pond, a bond strategist with Barclays Capital in New York.
