US Senate sets bailout vote, stocks rally
Reuters | 10/01/2008 11:01 AM
Printer-friendly version | 
Send to friend | 
Share your views
WASHINGTON/NEW YORK - The US Senate agreed to vote on Wednesday night on a new version of the $700 billion bailout package for Wall Street that will include a big increase in the amount of bank deposits protected by the government's insurance program, a Senate aide said on Tuesday.
Senate Majority Leader Harry Reid, a Nevada Democrat, received unanimous consent from the Senate to schedule the vote on the package, which the White House says is imperative to stem a credit crisis that has spread beyond Wall Street to claim more European banks.
The House of Representatives shocked markets by rejecting the package, prompting the worst sell-off on U.S. markets in 21 years. On Tuesday, stocks roared back and the dollar rallied as investors bet Washington would manage to salvage a package to stabilize the financial industry.
The Standard & Poor's 500 index shot up by more than 5 percent on Tuesday, the biggest one-day gain for that measure of the broad market in six years.
If the bailout package passes in the Senate, as expected, it will put more pressure on the House to follow suit when it meets again on Thursday.
The Senate bill would increase to $250,000 from $100,000 the amount of individual deposits insured by the Federal Deposit Insurance Corp (FDIC), seeking to shore up consumer and business confidence in banks. It may also win over lawmakers trying to sell their constituents on an expensive plan funded by taxpayers and seen as benefiting wealthy financiers.
President George W. Bush, Treasury Secretary Henry Paulson and the two candidates hoping to succeed Bush as president, Republican Sen. John McCain and Democratic Sen. Barack Obama, reaffirmed their support for a bailout plan on Tuesday.
Global money markets remained frozen, and London interbank offered rates shot to record levels, indicating banks were not lending to each other. The rate for overnight dollar loans rose to nearly 6.9 percent from just over 2.5 percent on Monday.
Senate leaders decided to attach the rescue measure to a package of tax breaks for energy and businesses that the Senate had previously approved.
The Senate was to vote on the plan sometime after a series of votes starting at 7:30 p.m. EDT (2330 GMT).
"We welcome the progress made by Senators Reid and McConnell toward a modified bill and to schedule a vote," said White House spokesman Tony Fratto.
Both Obama and McCain said they would return to Washington for the vote.
The plan, which would allow the Treasury to buy toxic mortgage-related assets from banks, has been the main hope for government action to unlock credit markets and head off a deeper economic downturn in the United States and abroad.
"We're right at the moment where action is needed," Dominique Strauss-Kahn, managing director of the International Monetary Fund, told Reuters. "A non-perfect plan is better than no plan at all."
U.S. regulators were also readying a revision of the "fair value" accounting rule that has led to massive charges on mortgage-related assets, and has been blamed for deepening the credit crisis. The upshot: U.S. banks do not need to mark hard-to-price assets down to firesale prices.
"All eyes are still on the authorities and their attempts to rescue the financial system," said Vassili Serebriakov, currency strategist at Wells Fargo Bank. "While the Treasury's bailout plan was rejected by lawmakers yesterday, most are still waiting for either a new vote or a 'plan B' type of move."
Global aftershocks
From Dublin to Moscow, the financial crisis is an ominous presence.
Ireland unveiled a blanket guarantee for savings held by its banks, and for the second time in a month Russia briefly shut down its stock markets.
France, Belgium and Luxembourg poured 6.4 billion euros into Franco-Belgian bank Dexia to avoid defaults on its loans, and France promised new bank measures to help depositors.
Shares of British bank HBOS Plc fell on concerns Lloyds TSB Group Plc could renegotiate a deal to buy HBOS.
Dutch-Belgian banking and insurance group Fortis was partially nationalized and regional U.S. bank Wachovia sold its banking operations to Citigroup.
The dollar rose against the yen and oil rebounded. European stocks bounced back from the three-year lows hit Monday.
Shares of the U.S. banks seen emerging with a strengthened hand after the crisis, including Citigroup Inc, JPMorgan Chase & Co and Bank of America Corp, shot higher on Tuesday.
Those gains came against the backdrop of the end of the third quarter, historically when corporate profit warnings and fund redemptions spike.
Hedge fund managers have been bracing for a wave of investors to cash out as money rushes to safe haven assets.
A number of the Republicans and Democrats who helped defeat the bailout are up for reelection in November in tight races and had faced widespread voter anger over the bailout.
Many Americans saw the $700 billion fund as an unfair burden on taxpayers and a reward for powerful bankers they blame for creating the housing market bubble.
That put the focus on potential changes to the rescue package that might win over votes from representatives in areas hardest hit by the housing crash such as Florida, California and the Southwest.
"Wall Street as we knew it is already toast -- beyond bailing out -- but the public still thinks of this legislation as bailing out Wall Street," said Donald Straszheim, vice chairman of Roth Capital Partners in Los Angeles. "Until this perception changes, do-overs to quickly pass similar legislation won't fly."
One of the first signs of how quickly the economic pain is spreading from Wall Street to Main Street will come with Wednesday's release of U.S. auto sales for September, when the financial crisis began to topple banks and freeze credit.
The White House announced on Tuesday that Bush approved a mammoth spending bill that includes a $25 billion loan package for automakers.
