From September 22, 2008

Washington divided over plans to offer Europeans a share of $700bn bailout

British and European banks could be excluded from Washington’s $700 billion (£382 billion) bailout amid a backlash over the financial burden on the US taxpayer.
While Hank Paulson, the US Treasury Secretary, wants to allow foreign banks to benefit from the scheme, some Democrats in Washington and others on Wall Street are angry that taxpayer funds may be used to prop up overseas businesses.
Uncertainty for banks such as UBS, the Swiss financial group, Deutsche Bank, the biggest bank in Germany, and HSBC comes two days after Mr Paulson and President Bush urged lawmakers in Washington to push through the largest financial intervention package since the Great Depression to avoid the meltdown of America’s banking system.
As Mr Paulson held meetings with Republicans and Democrats over the weekend to persuade them to nod through the package, dissent broke out over the terms. Chris Dodd, the Democratic chairman of the Senate Committee on Banking, Housing and Urban Affairs, acknowledged yesterday that the crisis demanded quick action, but made it clear that Democrats would not rubber-stamp the Administration’s proposal. It is believed that bankers from Deutsche Bank and UBS approached America’s central bank and other Washington agencies at the weekend to seek assurances they would be included in the bailout.

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Chris Whalen, the co-founder of Institutional Risk Analytics, a Wall Street consultancy, said: “How can Washington include foreign banks? Why should the American taxpayer pick up the tab for Deutsche Bank or UBS? Deutsche is the problem of the German Government, not us, and UBS is a problem for the Swiss.”
In their defence, banks such as HSBC and Deutsche have substantial businesses in the US and offered to contribute to last week’s $77 billion emergency fund for all banks to use after the collapse of Lehman Brothers.
Mr Paulson wants a fund into which banks can dump “toxic” mortgage-backed assets at a big discount. It is hoped that by allowing them to rid themselves of billions of dollars of these bonds, the banks will be able to cut their dangerous exposure to the US mortgage market, and begin lending to one another again.
He is hoping that Congress, which is dominated by the Democrats, will vote on the deal on Wednesday and make it law by the end of this month. Should the bailout be approved, the cost would far exceed US funds spent on the war in Iraq, and would also represent more than the combined annual US budgets for defence, health and education.
In a series of television interviews yesterday, Mr Paulson said that he deeply regretted having to ask the American taxpayer for $700 billion to bail out Wall Street banks, adding that the rescue plan “sticks in my craw”.
He said that while “I hate having to do this”, the rescue package represented “by far the least costly way to proceed for the economy”.
Many Democrats believe that in return for being bailed out with tax-payers’ money, banks such as Citigroup and JP Morgan Chase should cut the interest rates on a number of the mortgages they sold, to help struggling Americans to stay in their homes. The cost of reducing the terms of these mortgages, they argue, should be borne by the banks.
Nancy Pelosi, Speaker of the House of Representatives, said the package lacked the “necessary safeguards”.
She said Congress would take action this week to protect taxpayers’ interests and ensure the plan includes “independent oversight, protections for homeowners and constraints on excessive executive compensation”.
One of the world’s leading economists cautioned that the scheme would not be sufficient to save the US banking system from collapse.
Kenneth Rogoff, former chief economist at the International Monetary Fund and now Professor of Economics at Harvard University, said: “We should see this bailout only as the first step. This may well prove not to be enough, even though it is necessary. There will have to be other measures.”
The White House is concerned that the Democrats will slow down the package by insisting that too many other measures are included.
Mr Paulson added that Washington was applying pressure on other governments to take similar actions: “We have a global financial system and we are talking very aggressively with other countries around the world, and encouraging them to do similar things, and I believe a number of them will.”