The plan would spend up to $US700 billion, most of it on buying deeply devalued mortgages from the housing market's collapse and other bad loans held by tottering banks and other investors. The aim is to prevent credit from drying up and causing a meltdown of the US economy, which is still on the cards.
Media reports indicated the $US700 billion request could end up being cut by as much as half, with the rest subject to congressional approval at a later date. The proposed bailout, first rushed to Capitol Hill by Paulson as a three-page proposal, has now ballooned into a document of more than 100 pages, CNN reported.
A Democratic Senator said $US250 billion would be immediately available and another $US100 billion could be used when requested by the president for debt purchases. The Congress could bar the expenditure of the remaining $US350 billion only by passing a resolution to block it from being spent. Several other provisions in the proposed bill include more oversight and a way for the Government to reclaim losses from companies on mortgage related assets that lose money.
In Europe Belgium's Fortis looks like becoming the first large European continental bank to fall victim to the credit crunch, as the global chaos continues with Britain's Bradford & Bingley mortgage lender and American regional bank, Wachovia also teetering on the brink.
The Belgian central bank and the country's regulator are paving the way for a bailout of the huge banking and insurance group, which has a balance sheet of well over $A1.1 trillion and a market value at last Friday of just over $A25 billion.
The Belgian regulator is thought to be considering the creation of a "bad bank'' for assets similar to the controversial scheme proposed in America as a means of ensuring a deal.
There were reports this morning that french bank, BNP, might mount a bid for Fortis. Any uncertainty around the future of Fortis is likely to hit Royal Bank of Scotland, its partner with Santander of Spain in the consortium that bought ABN Amro last year for 102 billion euros just as the credit crunch was breaking.
They refused to withdraw the bid, and were allowed to continue by the UK, Belgium and Spanish central banks and regulators.
The Dutch banking assets that Fortis bought as part of the deal are yet to be transferred out of the special company used to execute the deal, which is legally a subsidiary of RBS, which raised over $A24 million and has sold more than $A10 billion in assets in the past four months. Fortis, which has 2,500 branches across Europe, replaced its chief executive last week which worried markets.
The Belgian government, regulators, and the Dutch central bank are all involved in the talks and a deal is expected to be announced over the next day to prevent a crisis of confidence that could spark public panic and a run on deposits across parts of Europe;something that would be a replay in Britain where Fortis is Britain's third-largest private car insurer and the fourth-largest travel insurer. There's talk the Luxemborg Government might take a stake in Fortis to support it.
In Britain Bradford & Bingley looks like being nationalised and then sold off. The Bank of England, the Financial Services Authority (like APRA in Australia) and the government appear to have agreed to nationalise B&B and then sell it off, much in the way the US regulators closed and seized Washington Mutual last Friday morning and then sold the loans, deposits and branches to JPMorgan Chase.
Santander, the Spanish bank, is in negotiations to buy B&B, but it is insisting on conditions. It would be the second British bank to be nationalized this year after Britain was forced to take Northern Rock into public ownership in February.
The FSA has been trying to find a single white-knight to take over B&B's loans in their entirety, but Britain's big banks refused to get involved. B&B shares tumbled to a record low on Friday.
The UK government forced the merger between the country's biggest mortgage lender, HBOS and Lloyds TSB. Britain's top five banks -- HSBC, Royal Bank of Scotland, Barclays, Lloyds TSB and HBOS -- and Santander already own about 30% of B&B between them after they stepped in to help save a rights issue that flopped in June. RBS, HBOS, Lloyds and Barclays (which bought the remnants of Lehman Bros. in the US) are in no position to extend a helping balance sheet, leaving HSBC and Santander which owns Abbey and Alliance and Leicester. In the US, Wachovia may struggle to find a 'friend' until the bailout bill is law, or there's some move by authorities to take it under control.
Some US commentators reckon possible suitors, one of whom is Citigroup (Which has gone from feather duster to potential white knight) might use the ploy JPMorgan ploy used with Washington Mutual: wait to see whether regulators will seize the bank, then buy the best assets and let the government sort out the rest of the mess. Besides Citi, Well Fargo (which might be a target for Goldman Sachs) and Banco Santander are said to be in talks to buy Wachovia.
They were part of the same group that passed up a chance to buy Washington Mutual which JPMorgan bought $US1.9 billion. Media reports say the possible buyers will wait to see what's in the bill, but have been demanding Government aid. That's something the Government refused in the case of Lehman Brothers and Merrill Lynch.
Wachovia shares fell 27% in New York on Friday. The buyer may get help from regulators, who said the US benefited from seizing and selling WaMu because the Federal Deposit Insurance Corp didn't have to use its $US45 billion deposit insurance fund.
JPMorgan plans to write down WaMu's loan portfolio by about $US31 billion ($A37.2 billion) - a figure that could change if the government goes through with its bail-out plan and JPMorgan takes advantage of it. JPMorgan said there will be another $US1.5 billion in merger costs.
And further failures will further elevate the month of September to peak of the list of miserable months, surpassing October, when the great crash of 1929 and the plunge of 1987 happened.
The financial landscape has been ripped up by the bankruptcy of Lehman Brothers the investment bank; the government's takeover of American International Group which was once the world's largest insurer, based on market value; the shotgun marriage of Merrill Lynch to Bank of America; the conversion of Goldman Sachs and Morgan Stanley to regulated bank holding companies from investment banks, and the collapse of the nation's biggest thrift, Washington Mutual, which ranks now as the biggest bank failure in U.S. history.
Goldman saw Warren Buffett snap up a $US5 billion shareholding to make his group the largest shareholder, and Mitsubishi of Japan grabbed a 20% stake in Morgan Stanley after they both abandonment the investment banking model to become old fashioned banks.
