Washington: The US Congress served notice on Tuesday it was unwilling to approve the $700 billion bank bailout in current form, setting up a political battle over how to handle the global financial crisis.
The plan’s cool reception by lawmakers came as news emerged that the FBI is investigating fraud allegations against several of the firms that have already been rescued by the government in recent days.
Lawmakers said they were wary of the emergency plan after hearing testimony from Federal Reserve chairman Ben Bernanke and Treasury Secretary Henry Paulson, who warned of dire economic consequences if the plan is not approved.
“What they have sent to us - this is not acceptable,” said Senator Christopher Dodd, chairman of the Senate Banking Committee. “This is not going to work.”
The proposal would give the government wide berth to purchase the piles of bad mortgage-related debt - subprime loans to people with shaky credit - which sparked the current crisis more than one year ago.
But with elections less than two months away and distrust of Wall Street running high, lawmakers were wary of handing taxpayers such an enormous bill or appearing to reward bank executives for the debacle.
“The party is over for this compensation for CEOs who take the golden parachute as they drive their companies into the ground,” House speaker Nancy Pelosi said.
Capitol Hill’s reluctance was a setback for the Bush administration and undercut a show of confidence in Wall Street by Warren Buffett, who invested five billion dollars in newly revamped Goldman Sachs.
The political wrangling also did little to help calm investor nerves.
The Dow Jones lost 1.5%, London’s FTSE 100 dropped 1.9% the CAC 40 in France shed 2.0% and the DAX in Frankfurt dropped 0.6%.
Shares in Asia were mixed. Japan’s Nikkei was off 1.2% but Hong Kong was up 1.5%.
Buffett, the legendary “Oracle of Omaha” whose stock picks are followed by investors around the globe, made the move less than 48 hours after Goldman and Morgan Stanley gave up their once vaunted status as investment banks.
Transforming themselves into bank holding companies under much greater federal oversight, the move marked the end for the major independent investment banks once synonymous with Wall Street’s glamour and power.
But the move, approved by the Fed at the weekend, may have salvaged the firms at a time when they were essentially the last major investment banks still standing.
In after-hours trading, Goldman shares shot up 8.1%.
Bear Stearns went under in March, Lehman Brothers folded this month and Merrill Lynch was taken over by commercial banking heavyweight Bank of America.
Meanwhile the two mortgage giants at the heart of the subprime loans crisis, Freddie Mac and Fannie Mae, have also been taken over by the government along with global insurer AIG.
Media reports late Tuesday said that Lehman Brothers, Freddie Mac, Fannie Mae and AIG were all among firms being investigated by the FBI for “misinformation” about their assets.
FBI Director Robert Mueller said last week that the bureau was probing 26 financial institutions but gave no details. US network ABC said Tuesday the investigation was “much deeper” than had been earlier believed.