US Senate approves bailout

The US Senate approved a $700 billion (€501.5 billion) bailout of the financial industry, putting pressure on the House to approve a plan that political and financial leaders called crucial to averting economic catastrophe.

The revised legislation is aimed at reinvigorating worldwide credit markets and interbank lending that had frozen up while overleveraged financial institutions staggered under the weight of failed mortgages.

But market participants warned that the rescue package is not a cure-all, with a worsening economic outlook spurring calls for central banks to cut interest rates.

Stocks in Asia were lower yesterday on recession fears, and European stocks were also forecast to open weaker. Treasuries rose and the dollar gave up early gains.

"Even if the Bill is passed, worries remain over the global economic outlook so financial markets are unlikely to stabilise," said Masamichi Adachi, senior economist at JPMorgan in Tokyo.

"It's a completely different world now. All the things US authorities are doing now are simply aimed at preventing a global meltdown."

Amid warnings that failure to act could plunge the country into a depression, the Senate voted 74 to 25 in favour, sending the measure to the House of Representatives, probably for a vote today.

US President George W. Bush praised Senate passage of the package and urged the House to quickly do the same.

"With the improvements the Senate has made, I believe members of both parties in the House can support this legislation," Mr Bush said in a written statement. "The Bill the Senate passed is essential to the financial security of every American," he said.

Leaders in the US House of Representatives, where Monday's "no" vote rocked global markets, expressed cautious optimism that the legislation would be approved.

Senate leaders hope that sweetening the plan with a tax cut and extended federal protection for bank deposits can turn "no" voters into supporters. "It's still uncertain. I think it is likelier to pass than before," House Financial Services Committee chairman Barney Frank said in an interview on CNN.

"The main change is reality. I think that it's not possible now to scoff at the predictions of doom if we don't do anything," the Massachusetts Democrat added.

Many Americans resent the idea that Wall Street is being "bailed out" at taxpayer expense, and have made their views clear in e-mails and calls to Washington, putting pressure in particular on vulnerable members of the House of Representatives.

All 435 House seats will be contested in the election on November 4, as opposed to 35 seats up for grabs in the Senate.

Treasury Secretary Henry Paulson, whose original three-page proposal grew to hundreds of pages when Congress got involved, praised the Senate vote and urged the House to act swiftly to ratify it.

Should the House uphold the Bill, it would go to the White House for signature into law by President Bush.

"This sends a positive signal that we stand ready to protect the US economy by making sure that Americans have access to the credit that is needed to create jobs and keep businesses going," Mr Paulson said.

The financial crisis has become the biggest issue in the upcoming US elections, and both presidential candidates, Republican Senator John McCain and Democratic Senator Barack Obama, voted for the package.

The credit crisis reverberated among European banks while recessionary signals mounted in the US.

Key pieces of Senate Bill

The roughly €107.4 billion cost of the tax package is partially offset by some revenue raising measures.

Major tax provisions in the Bill include:

• Extends Alternative Minimum Tax relief for some 24 million middle class taxpayers through 2008. Includes some additional AMT relief for people who exercised company incentive stock options.

• Extends provision allowing home owners who do not itemise their taxes to take a deduction up to €716 for state and local property taxes.

• Extends through next year a provision allowing some taxpayers to take a deduction for state and local sales taxes.

• Extends a tax break for certain higher education expenses for taxpayers who do not itemise their deductions.

• Includes a provision that would require insurance plans that offer mental health benefits to offer those benefits at the same level as medical-surgical benefits.

• Provides tax exempt private activity bonds for Texas, Louisiana and Midwestern states hit by natural disasters. Provides tax benefits to help develop low income housing and businesses.

• Extends the research and development tax credit through next year.

• Provides €12.8 billion in tax breaks for clean energy by continuing production tax credits for wind and refined coal and allowing facilities that generate electricity from waves and tides to qualify. Also extends tax breaks for solar energy.

• Provides new tax credits for carbon capture and sequestration demonstration projects for advanced coal electricity generation.

• Creates a new category of tax credit bonds to finance state and local government initiatives to cut greenhouse gas emissions.

• Creates new tax credit of up to €5,373 for plug-in electric drive vehicles.

• Extends tax credit for biodiesel production through next year.

• Extends tax credits for homeowners who update with energy efficient products. Energy efficient biomass fuel stoves for the first time would qualify for a €214.9 credit.