Relief for world money markets as US approves $700bn bail-out

Published on Friday 3 October 2008 22:23

THE massive United States banking bail-out that global markets have been desperately holding out for was finally passed last night.

The $700 billion (380 billion) package was approved by 264 votes to 171 by the House of Representatives, at the second attempt.

An earlier version of the deal was rejected on Monday, triggering a massive slump on Wall Street that sent shockwaves around the world's financial markets.

The US Senate passed an amended bill on Wednesday that raised the government's guarantee on savings from $100,000 to $250,000.

It also included tax breaks to help small businesses and boost alternative energy, expanded the child tax credit and extended help to victims of recent hurricanes.

That was enough to win over the House of Representatives, and the bill was signed last night by George Bush, the US president.

It will allow the US Treasury to buy toxic debt from American banks, a move many believe is needed to head off the country's worst financial crisis since the Great Depression.

Before the vote had even taken place, the White House moved to dampen speculation that the bail-out deal would bring an immediate boost to the US economy.

A spokesman said: "This legislation is to fix a problem in our financial markets.

"It's not sold as giving a boost to the economy, but rather preventing a crisis in our economy. If it works as we hope it will, credit will be able to begin flowing again."

The decision is expected to bring relief to international money markets, which feared a deep slump in the US economy could drag the rest of the world into recession.

After the vote, Ben Bernanke, the chairman of the Federal Reserve, said the US central bank would do whatever it could to combat the credit crisis and help the economy.

"We will continue to use all of the powers at our disposal to mitigate credit market disruptions and to foster a strong, vibrant economy," he said.

He said the bill was a critical step towards stabilising financial markets and ensuring a freer flow of credit.

Henry Paulson, the US Treasury secretary, pledged speedy action to get the rescue programme up and running.

He said he already had staff working on it. "This was obviously a very important vote. It was a vote to protect the American people…and their jobs," he said. "There are a wide variety of tools that have come with this legislation, and which, combined with the other authorities we have, are going to be very important in protecting the stability of the financial markets, which ultimately protect the economic security of the American people."

Mr Bush, Mr Paulson, Nancy Pelosi, the Speaker of the House, and presidential candidates Barack Obama and John McCain had all backed the bill, warning its rejection would turn a crisis into a disaster.

Its rejection had been seen as unthinkable by many experts, and it would have represented a catastrophic failure of leadership at all levels of the US government.

However, some politicians had shied away from endorsing it, fearing for their jobs in next month's elections if they approved legislation that was so unpopular with some of the voters they represent.

Ms Pelosi, a Democrat, said the US had faced "terrible ramifications for everyone on main street" and that "the bright light of accountability" would protect the taxpayer. She went on:

"We were dealt a bad hand – we made the most of it."

James Clyburn, the Democrat majority whip, said: "We came together in a very strong, bipartisan way to deliver this decisive victory for the American people."

John Lewis, a Georgia Democrat, said: "I have decided that the cost of doing nothing is greater than the cost of doing something."

South Carolina Republican J Gresham Barrett, who opposed the bill on Monday, said: "There are still tough times out there. People are mad – I'm mad. We have to act. We have to act now."

It's not a quick fix, but market confidence will be restored

Is the crisis over?

No, but the move should restore confidence to the markets and boost liquidity as banks should be more likely to lend to each other now that the so-called toxic assets are being removed from their balance sheets.

How long before the scheme starts to improve things?

Nothing will change overnight. Stock markets are likely to receive a short-term boost, but this has been factored in.

The key issue relating to the scheme is what price the US government will pay for the assets. If it pays too much it will be strongly criticised, but if it pays too little the scheme will not have the desired effect. Pricing the assets is likely to take several weeks.

What impact will the scheme have on the UK?

Some UK banks, such as Barclays, Royal Bank of Scotland and HSBC, are likely to be able to take part in it. It has been estimated that UK banks hold around 95 billion of assets that will qualify for the scheme.

Will the Bank of England cut interest rates next week?

It is widely expected interest rates will be cut on Thursday for the first time since April.