U.S. regional bank Wachovia Corp succumbed to the worldwide credit crisis and authorities rescued a slew of European banks, while U.S. lawmakers met to vote on a $700 billion bailout of the financial industry.
U.S. stocks fell more than 2 percent following sharp declines in Asian and European shares on fears the crisis was spreading. Global money markets remained frozen, even as central banks poured in cash in an attempt to boost liquidity.
"These (bank) announcements couldn't have worse timing because they're taking the shine off the potential bailout," said William Larkin, fixed income manager at Cabot Money Management in Salem, Massachusetts.
As lawmakers met in Washington, President George W. Bush urged them to pass the bailout package quickly, saying it was needed to keep the financial crisis from spreading.
The bailout came too late for Wachovia, which agreed to sell most of its assets to Citigroup Inc in a deal brokered by the Federal Deposit Insurance Corp.
"In this period of market stress, we are committed to taking all actions necessary to protect our financial system and our economy," Treasury Secretary Henry Paulson said after the Wachovia deal was announced.
The Dow Jones industrial average was down 2.7 percent and the broader S&P 500 index was down 3.6 percent. The U.S. dollar pared some gains against the euro and yen after the Citigroup-Wachovia deal. Oil fell more than $6 a barrel.
Around the world, investors dumped assets they regarded as risky. World stocks were down more than 4 percent and were on track for their biggest one-day loss in at least 20 years.
Central banks announced a $330 billion expansion of currency swap arrangements, which allows them to increase the amount of money they can provide in their home markets, effectively throwing more money at the crisis.
Earlier, the governments of Belgium, the Netherlands and Luxembourg moved to partly nationalize Belgian-Dutch group Fortis NV with an injection of more than $16 billion, and German lender Hypo Real Estate Holding AG secured a credit line from the German government and banks of up to 35 billion euros.
British mortgage lender Bradford & Bingley Plc was brought under the government's wing, shares of French bank Dexia tumbled on a report that it might need emergency capital, and bank rescue deals also emerged in Iceland, Russia and Denmark.
"The contagion is spreading to mainland Europe and everyone's asking, 'Who's next?'" said Mark Sartori, head of European sales trading at Fox-Pitt, Kelton in London.
The Wachovia deal is the latest in a series of events that has transformed the American financial landscape and wiped out hundreds of billions of dollars of shareholder wealth.
The changes include the government takeover of mortgage finance companies Fannie Mae and Freddie Mac, the bankruptcy of Lehman Brothers Holdings Inc, the failure of giant savings and loan Washington Mutual, and Bank of America Corp's purchase of Merrill Lynch & Co.
As the U.S. House of Representatives convened to vote on the bailout plan, which would give the Treasury funds to buy toxic debt from struggling banks, key lawmakers said the bill had enough votes to pass. House leaders were pushing for a vote by early afternoon.
Opening House debate on the bill, Rep. Barney Frank, chairman of the House Financial Services Committee, said the chamber faced a tough vote, a nod to Republicans who had balked at spending so much taxpayer money just weeks before U.S. elections.
The Senate is expected to vote on the plan Wednesday.
MAIN STREET
Both U.S. presidential candidates, Republican John McCain and Democrat Barack Obama, have offered qualified support for the bailout proposal, an issue that has almost overshadowed their campaigns with less than six weeks until the election.
With many Americans struggling to save their homes from foreclosure, lawmakers braced for a grass-roots backlash against a bailout for Wall Street banks, which contributed to the U.S. housing bubble with reckless lending.
A deal struck in negotiations on Sunday altered key parts of the bailout program proposed by the Bush administration.
In the final hours of talks, Democrats and Republicans rushed to add safeguards for taxpayers and provisions that would allow the government to recover funds if the housing market stabilizes and its holdings of bad debt gain value.
The proposed legislation would disburse the $700 billion in stages. The first $250 billion would be issued when the legislation is enacted; an additional $100 billion could be spent if the president decided it was needed. The remaining $350 billion would be subject to congressional review.
Institutions selling soured assets to the government would issue stock warrants to the government, a step intended to give taxpayers a chance to profit if markets recover.
The plan would also let the government buy troubled assets from pension plans, local governments and small banks.
In response to a clamor for limits on executive pay, no executives at participating firms would get multimillion-dollar severance packages, known as golden parachutes.
(Additional reporting by Patrick Rucker in Washington, Philip Blenkinsop in Brussels, Reed Stephenson in Amsterdam, Jan Dahinten in Singapore, Andrew Callus in London, and Krista Hughes in Frankfurt)
