Critical days ahead for U.S. bailout plan

U.S. House of Representatives Speaker Nancy Pelosi and President George W. Bush both expressed optimism on Friday that a deal could be reached soon to stave off the worst U.S. financial crisis since the Great Depression.

Talks on Thursday had collapsed in acrimony. A second day of intense negotiations on Friday between rancorous Democrats and Republicans failed to produce accord on how to structure a deal allowing the government to buy up soured assets that are choking credit.

There were fears that U.S. stocks, which ended up mostly higher on Friday as bank shares rallied on optimism for a deal, would take a dive if there is no accord before markets reopen, with reverberations in the world economy.

"I believe that progress has been made," said Pelosi, a California Democrat. "We will not leave until legislation is passed. We will be working through the weekend to achieve that end."

Early in the week there had been hopes for speedy approval of the plan by Congress, crafted by Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke and presented to Congress last weekend.

But conservative Republicans balked. With an eye to bring them on board, Democrats have now offered to add a mortgage insurance measure. Republicans had wanted the government to offer coverage for roughly half of all mortgage-backed securities that it does not already insure.

Although Democrats control Congress, they are hesitant to pass a bailout bill without rank-and-file Republican support because it could leave their party politically exposed just weeks before the presidential and congressional elections.

The bailout dominated barbed early exchanges on Friday evening in the first presidential debate between Republican John McCain and Democrat Barack Obama in the run-up to the Nov. 4 election.

Both candidates said they wanted a deal soon but acknowledged the price of the rescue plan would force the next president to make tough choices and pare back government spending.

Obama said the economic crisis was the "final verdict on eight years of failed economic policy promoted by (President) George Bush and supported by Senator McCain."

McCain said he favored a plan where the government would give loans to failing financial institutions rather than buy their soured assets, such as bad mortgages.

CRUCIAL TO ECONOMY
The $700 billion bailout, the largest of its kind in U.S. history, aims to remove soured assets from the books of fragile banks and revive frozen credit markets. The value of the assets, mostly mortgage-related, tumbled as the U.S. housing market slumped.

Even with a deal, the U.S. economy faces serious problems -- sluggish growth and rapidly falling home prices.

"Wall Street is banking on a definitive agreement in place before markets open on Monday," said Fred Dickson, director of retail research at D.A. Davidson & Co in Lake Oswego, Oregon. "The plan is crucial to keeping the economy afloat."

The 13-month-old credit crisis came to a head this month after the U.S. government's takeover of mortgage companies Fannie Mae and Freddie Mac, the bailout of insurer American International Group Inc, as well as the bankruptcy filing by Lehman Brothers.

On Friday, bank stocks tumbled as institutions worldwide hoarded cash and showed a growing reluctance to lend, driving rates that they charge each other on loans to a record high in London.

"What you're going to see is the strong stronger, and the weak are going to die off," said William Smith, president of Smith Asset Management in New York.

Global money markets dried up, forcing increased injections of cash from central banks. With no relief in sight, investors flocked to the safety of cash and U.S. government securities.

MARKETS UNCERTAIN
Just before Wall Street trading closed on Friday, The New York Times said Wachovia Corp , the sixth largest U.S. bank, was in early talks with Citigroup . Wachovia stocks dropped 36 percent on Friday before closing 27 percent lower on the possible deal. Later reports said other banks were considering buying Wachovia.

In Europe, Belgian-Dutch financial group Fortis NV denied it had a liquidity problem after its shares tumbled more than 20 percent to a 14-year low. Later, Fortis sacked its interim chief executive.

U.S. regulators seized savings and loan Washington Mutual Inc late on Thursday, the biggest bank failure in U.S. history, and sold its assets to JPMorgan Chase & Co .

Citing the crisis, Europe's biggest bank, HSBC Holdings Plc , said it was cutting 1,100 jobs, adding to more than 80,000 job losses in banking in the past 18 months.

"The markets are just caught like a deer in the headlights, watching Washington, trying to figure out what the next step is," said Boris Schlossberg, director of currency research at GFT Forex in New York.