America: Markets rally as Bush appeals for deal on bailout

By David Usborne in New York

Wednesday, 1 October 2008

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Members of the US Congress came under extreme pressure yesterday to overcome their aversions to the proposed $700bn (£380bn) bailout of the American banking system, as markets around the world dared to hope that a deal would finally emerge before the week's end.

Investors were betting that the deadlock in Washington would end as the Dow Jones industrial average rose 485 points before the close in New York. The rebound covered more than half of the dizzying 778 points lost after the House of Representatives shocked the world by rejecting the bailout action on Monday.

Congressional negotiators and Treasury officials were groping for amendments significant enough to bring at least 12 hold-outs on board while not losing any of those who voted yes. Converting just a dozen lawmakers would be enough to reverse Monday's vote, when the package went down by 228 to 205.

President George Bush, who has failed to corral support even from his own party for the package, made one more attempt to convince sceptics, warning that the economic crisis risked deepening otherwise. "If our nation continues on this course, the economic damage will be painful and lasting," he insisted.

If the House votes in favour of an amended bill tomorrow or Friday, it would be taken up quickly by the Senate and passed to Mr Bush for signature. Senate Republican Leader Mitch McConnell of Kentucky said it was time for lawmakers to "act like grown-ups ... get this done for all of the people".

Senator Hillary Clinton said that the Senate might even move to vote on a new package first if necessary, adding her own voice to the chorus of warnings about inaction. "It sounds dire, but there is a risk that commerce could grind to a halt," without a bailout deal, she said.

The extraordinary drama continued to cast a shadow over the presidential race. The nation is set to return its gaze to the contest tomorrow night when Sarah Palin, the Republican running mate, will meet Joe Biden, the Democrat number two, in St Louis, Missouri, in their only debate before election day.

Barack Obama urged Congress to get back to work on the bailout proposals and resist any urge to start from scratch. "While I, like others, am outraged that the reign of irresponsibility on Wall Street and in Washington has created the current crisis, I also know that continued inaction in the face of the gathering storm in our financial markets would be catastrophic for our economy and our families."

Both Mr Obama and his Republican opponent, John McCain, voiced support for one potentially significant tweak, first suggested by some Republicans, that would involve raising the limit on insurance for bank deposits offered by the Federal Deposit Insurance Corporation from $100,000 to $250,000.

Although the idea to increase FDIC limits came from Republicans, by embracing it Mr Obama could win Democratic support for it. There was also word of changing accounting rules that force banks to value their assets according to existing market conditions, even if they plan to hold them over a long period. The "mark to market" rule can means banks announce huge on-paper losses when it might be unnecessary.

Mr Obama spoke directly to Congressional leaders about the idea, aides said, getting more directly involved in trying to salvage the legislation. How they handle the issue is a dilemma for both candidates. Mr McCain grandly "suspended" his campaign last week and returned to Washington to play deal-maker. When no such deal happened, it seemed his gambit had misfired badly.

"The expansion of the FDIC coverage would would boost small businesses, make our banking system more secure, and help restore public confidence in our financial system," Mr Obama said from the campaign trail. Earlier he had spoken by telephone with President Bush.

Mr Bush, who was speaking from inside the White House, noted also that although the $700bn that would be used to relieve banks of distressed debt is a lot of money, it was nonetheless dwarfed by the $1.2 trillion that were wiped off the value of publicly quoted companies during Monday's meltdown. He also reminded lawmakers that the assets that would be bought could increase in value over time.

"Because the government would be purchasing troubled assets and selling them once the market recovers," he said, "it is likely that many of the assets would go up in value over time. Ultimately, we expect that much – if not all – of the tax dollars we invest will be paid back."

Because of the Jewish New Year there was no full session of Congress yesterday and nor is there likely to be until tomorrow.

Attention will be focused particularly on the few members of Congress, both Republicans and Democrats, whose seats are in particular jeopardy ahead of elections on 4 November. "I recognise this is a difficult vote for members of Congress," Mr Bush said. "And I understand that. But the reality is we are in an urgent situation and the consequences will grow worse each day if we do not act."

"We're all worried about losing our jobs," noted Representative Paul Ryan of Wisconsin, who ended up supporting the bill after opposing an earlier draft last week. "Most of us say, 'I want this thing to pass, but I want you to vote for it, not me'."

Nick Lampson of Texas said he voted 'no' because bailing out Wall Street at a time when his constituents are struggling to recover from Hurricane Ike made supporting it impossible. "I thought it was a $700bn boondoggle that I thought had a huge, dramatic impact on our citizenry," he added.