Doubts grow on US financial rescue plan

Source YahooFinance-AFP

WASHINGTON (AFP) - Doubts emerged Monday about a gargantuan 700-billion-dollar US bailout of the finance system, plunging markets into renewed turmoil, as oil prices surged, the dollar slid and stocks faced fresh pressure.

US and European markets fell hard as anxious investors waited on lawmakers to pass the measure and President George W. Bush urged top speed.

The "whole world is watching to see if we can act quickly to shore up our markets and prevent damage to our capital markets, businesses, our housing sector and retirement accounts," Bush said, amid growing unease about the proposals' fate in the US Congress.

The plan to buy toxic mortgage-related assets from the banks was unveiled Friday to fight the gravest financial crisis since the Great Depression of the 1930s.

The plan drew praise from some, but also stinging protests from lawmakers from both parties and various analysts.

International Monetary Fund managing director Dominique Strauss-Kahn welcomed the "bold steps" taken by the United States to stabilise the financial system, but also warned global steps were required to get past the crisis.

"I welcome the bold steps being taken in the US and look forward to their effective implementation," the International Monetary Fund chief wrote in the Financial Times, as Congress debated the US Treasury's proposed multi-billion-dollar bailout for the banking industry.

Texas Republican Representative Jeb Hensarling said lawmakers should carefully study options before approving the plan.

"Congress is being asked to support an uncertain entity, costing an uncertain amount of dollars, for an uncertain duration," he said.

"My fear is that taxpayers will be left with the mother of all debts, the federal government becomes the lender and guarantor of last resort, and our nation finds itself on the slippery slope to socialism."

Robert Reich, a former Labor secretary and professor at the University of California, said the plan was unpalatable.

"The public doesn't like a blank check. They think this whole bailout idea is nuts," he said.

"They see fat cats on Wall Street who have raked in zillions for years, now extorting in effect 2,000 to 5,000 dollars from every American family to make up for their own nonfeasance, malfeasance, greed, and just plain stupidity."

Despite the protests, many expect the plan to be approved to help stave off a further meltdown of the financial system with dire economic consequences.

"We were on the edge of the abyss last week," said Ed Yardeni at Yardeni Research.

"The question is whether so much government intervention will avert the most dreaded consequences of Wall Street's excesses, namely a financial meltdown and an economic depression .... The answer, I think is that it will work, and that the economy should grow next year."

On Wall Street, the Dow Jones Industrial Average plunged 3.27 percent to end at 11,015.69. giving back its gains from Friday's rally. The Nasdaq composite slumped 4.17 percent and the Standard & Poor's 500 index shed 3.82 percent.

There were also substantial declines in Europe as investors turned anxious about the 700-billion-dollar US government scheme to buy up troubled mortgage-backed securities from distressed banks.

"While desperate times require desperate measures, this might be a bit too desperate," said Paul Nolte, analyst with Hinsdale Investments.

"Of course, even if passed, the program will not have an immediate impact upon the markets -- it will be drawn out over the next six to 12 months," Nolte added.

Gold rose sharply as investors sought safety while the dollar fell against the euro and the yen.

Crude oil prices skyrocketed in the biggest one-day dollar gain on record in New York trade. New York's main contract, light sweet crude for October delivery, soared 16.37 dollars a barrel, or 16 percent, to 120.92 dollars.

News that once stellar US investment banks Morgan Stanley and Goldman Sachs had received approval to become regulating banking firms, ending the era of major Wall Street investment firms, underscored the severity of the crisis.

"This is really the end of Wall Street as we have known it for decades if not for a century," said Nouriel Roubini, a New York University economist who has argued that the Wall Street firms were part of an unregulated "shadow banking system" that led to speculative market excesses.

Meanwhile, Japanese banking giant Mitsubishi UFJ Financial Group said it will buy 20 percent of Morgan Stanley in a deal worth up to 8.5 billion dollars.

At the same time, top Japanese brokerage group Nomura Holdings said it was to buy all the Asian operations of failed US investment bank Lehman Brothers.

For London, which vies with New York for the title of being the world's top financial center, the government was trying to draw a line under the crisis with a series of reforms to increase regulatory oversight.

British finance minister Alistair Darling announced that a bill will be presented in two weeks for "strengthening the supervision of the banking system, making it easier to intervene if a bank gets into trouble."

Taking up the theme, the Group of Seven industrialized nations pledged cooperation to address the financial turmoil.

"We are ready to take whatever actions may be necessary, individually and collectively, to ensure the stability of the international financial system," said a statement from officials from the United States, Japan, Germany, France, Britain, Canada and Italy.