Financial World Shaken
In a move sure to reverberate throughout the financial world the US House of Representatives failed to pass the US bailout by a vote of 228 to 205. Stock markets reacted quickly and violently with the Dow falling 700 points. Political bickering was blamed for the defeat but several Republican legislators refused to support the bailout plan proposed by the Bush administration. Recent actions by the Fed have somehow made the US dollar the currency of choice for risk adverse investors and interbank Forex markets.
Political Opposition
Democrats said the bill does not do enough to protect average Americans. In an excerpt from Speaker of the House Pelosi’s speech she stated, “Democrats insisted that legislation responding to this crisis must protect the American people and Main Street from the meltdown on Wall Street. The American people did not decide to dangerously weaken our regulatory and oversight policies. They did not make unwise and risky financial deals. They did not jeopardize the economic security of the nation. And they must not pay the cost of this emergency recovery and stabilization bill.” Representative John Culberson, a Republican from Texas, said the measure would leave a huge burden on taxpayers. “This legislation is giving us a choice between bankrupting our children and bankrupting a few of these big financial institutions on Wall Street that made bad decisions.”
Markets React
Credit markets remain frozen and the crisis has spread to Europe. Several banks have been taken over recently and in the UK the government had to bail out mortgage giant Bradford and Bingley. Banks and financial firms in both the US and Europe have essentially ceased loaning money to each other in recent weeks creating a serious credit crisis. Interbank Forex markets also reacted and the future of the US dollar remains uncertain. The crisis stems from mortgage backed securities which saw their value plunge as home prices have gone into their worst slide since the Great Depression. In turn the market for these toxic securities evaporated leaving many banks holding greatly devalued securities which could cause the failure of firms holding these securities.
Financial Sector in Disarray
The failure of the bailout plan follows weeks of sobering news from the US banking sector. Monday morning, the Federal Deposit Insurance Corp. arranged for the sale of the banking assets of Wachovia, the nations fourth largest bank to CitiGroup for 2.2 billion dollars in stock. In other news, the Fed bailed out insurance giant American International Group, loaning it $85 billion in return for a nearly 80% ownership, and Washington Mutual became the biggest bank failure in US history.
Both the White House and Congressional representatives and Senators have indicated that the plan is not dead and that a compromise can be worked out. Markets around the world including Interbank Forex will be watching with intense interest.
