U.S. reaches outline for bailout deal to create $700 billion gov't fund

After marathon talks into the wee hours of Sunday morning, congressional leaders from both parties emerged with an agreement that altered key parts of a Wall Street bailout program initially proposed by the Bush administration.

The preceding week of negotiations over the rescue package roiled financial markets and altered the course of the U.S. presidential campaign less than six weeks before the election.

"We've made great progress," House of Representatives Speaker Nancy Pelosi told reporters after the talks.

Treasury Secretary Henry Paulson lobbied hard for the package -- the largest bailout in U.S. history -- saying it would keep credit markets from grinding to a halt under the burden of bad mortgage-backed bonds created by banks at a time when it looked like home prices had nowhere to go but up.

Congress was racing to reach an agreement before Asian financial markets open on Monday to avoid a repeat of last week's white-knuckle volatility. It was unclear when the House and the Senate would vote on the bailout legislation, or whether last-minute hitches might arise.

U.S. President George W. Bush spoke with Pelosi on Saturday evening and news of a deal was welcomed at the White House.

"We're pleased with the progress tonight and appreciate the bipartisan effort to stabilize our financial markets and protect our economy," White House spokesman Tony Fratto said.

"We're pleased with the progress tonight and appreciate the bipartisan effort to stabilize our financial markets and protect our economy," White House spokesman Tony Fratto said.

At one point, lawmakers consulted by phone with billionaire investor Warren Buffett, who last week invested $5 billion in Goldman Sachs and also warned that markets were in a "dangerous situation" and on the verge of breaking down.

With public anger simmering over a bailout for Wall Street as many Americans fear losing homes and jobs, Democrats and Republicans rushed to add safeguards for taxpayers.

The proposed legislation would disburse the $700 billion in stages, starting with an initial $250 billion. An oversight board of top officials, including the Federal Reserve chairman, would supervise the program.

Executives at troubled banks offloading distressed assets to the government would face limits on exit pay known as "golden parachutes."

In addition, participating banks would grant stock warrants so taxpayers "can gain as companies recover and as the economy recovers," said Democratic Sen. Kent Conrad of North Dakota.

FEAR OF CONTAGION
Fear-wracked financial markets brought urgency to the weekend of congressional negotiations. In recent weeks, big banks have teetered, collapsed and refused to lend money to each other.

Regulators seized Washington Mutual Inc on Thursday in the biggest bank failure in U.S. history, selling its assets to JPMorgan Chase & Co. Washington Mutual filed for bankruptcy on Saturday with $8 billion in debt.

Meanwhile, published reports said Wachovia Corp, the sixth-largest U.S. bank, began merger talks with potential partners after a 27 percent drop in its shares on Friday.

Investors worried about the risk of a contagion effect as the crisis showed signs of spilling over to Europe, where Belgian-Dutch financial group Fortis NV fired its interim chief executive after liquidity concerns pushed its shares to a 14-year low.

In London, regulators were in talks on the future of troubled lender Bradford & Bingley, raising the prospect that a second British bank could be nationalized.

The bailout deal capped a tumultuous week in which markets churned as news out of Washington made a deal look imminent at one moment and then out of reach the next.

Lawmakers announced a deal in principle on Thursday but conservative Republicans in the House balked, saying taxpayers should not be put on the hook for a private market failure.

Negotiations were thrown into further disarray as Republican presidential candidate John McCain suspended his campaign and rushed back to Washington, leading Democrats to charge that he was playing politics with the crisis.

Both McCain and Democratic nominee Barack Obama were in touch with congressional negotiators as talks hurtled toward a conclusion late on Saturday.

In the end, House Republicans won support for a provision that would create a privately funded insurance program for mortgage-backed securities, congressional aides said.

Democrats jettisoned proposals that would have put money into a trust fund for affordable housing and would have allowed judges to alter the terms of mortgages for bankrupt borrowers, according to aides.

As the majority in Congress, Democrats could have sought to force a bill through the House and Senate but leaders demanded a deal that would satisfy both parties to protect lawmakers from a voter backlash.