Bush Signs $700bn Economic Bail-out Plan Approved By Congress

The Bush administration's $700bn emergency bail-out for the banking industry finally became law today after a week of persuasion, negotiation and horse-trading prompted Congress to reverse its opposition to the plan.

In a vote watched anxiously by traders on Wall Street, the House of Representatives backed the financial rescue plan by a comfortable margin of 263 to 171. The vote overturned Monday's shock result in which lawmakers opposed it 228 to 205.

The bill, which allows the US treasury to clean up banks' balance sheets by purchasing distressed mortgage-backed securities, was signed by President Bush within hours of congressional approval.

But it came too late to prevent the worst week on Wall Street for seven years which ended with a fresh slide in stocks as the Dow Jones Industrial Average dropped by 157 points to 10,325.

President Bush acknowledged that it had been a tough week: "There were moments this week when some thought the federal government could not rise to the challenge."

Thanking leaders of both parties for rallying support, Bush said: "By coming together on this legislation, we have acted boldly to prevent the crisis on Wall Street from becoming a crisis in communities across our country."

Business leaders hope that the rescue package will thaw out the frozen credit markets and restore confidence in struggling banks. It includes measures to limit pay for senior banking executives and to increaser the insured limit of US bank balances from $100,000 to $250,000. The treasury is likely to begin buying banks' assets this week.

The Federal Reserve's chairman, Ben Bernanke, welcomed the plan's approval: "The legislation is a critical step toward stabilizing our financial markets and ensuring an uninterrupted flow of credit to households and businesses."

The US Chamber of Commerce, which represents business leaders, said: "With the American economy on life support, Congress took the necessary step to stop the bleeding."

About 40 members of the House of Representatives changed their vote to support the plan, alarmed by jittery markets and by deteriorating economic conditions. Official figures released today showed the worst drop in US employment for five years as 159,000 people disappeared from payrolls during September.

John Lewis, a Democrat who switched sides, said: "I have decided that the cost of doing nothing is greater than the cost of doing something."

Both presidential candidates - Barack Obama and John McCain - expressed support for the package in spite of an estimated $100bn of controversial tax credits added to win support from waverers. These included aid for special interests including Hollywood film studios and for the manufacturers of children's wooden arrows.

The Democratic leader in the House, Steny Hoyer, said: "The American people expected us to act, to respond to the best extent we could, to stop the downward flow in the markets and to restore the flow of credit in the economy."

There has been a dismal flow of negative financial news throughout the week including a slump in factory orders and a steady decline in house prices. John Silvia, chief US economist at the banking group Wachovia, said all the indicators pointed to a likely shrinking in the US economy in the final quarter of the year: "You put the whole package together and basically, we're in a recession. What more can you say?"

Wall Street's close eye on Congress has caused difficulties in recent days. The leader of the Democrats in the Senate, Harry Reid, caused a sell-off in insurance shares by suggesting that an unnamed "major insurance company" was "on the verge of going bankrupt" because of delays to the bail-out, which is designed to aid the financial sector by mopping up toxic securities from struggling banks.

Critics of the bail-out still have strong reservations - some have pounced on an apparent admission by the Treasury that the figure of $700bn to buy up securities was arbitrary. Forbes magazine quoted a treasury spokeswoman saying that it was not based on any particular data point: "We just wanted to choose a really large number."

Such is the freeze on funding that the governor of California, Arnold Schwarzenegger, said his state may need a loan of up to $7bn from the federal government to plug a short-term financial gap caused by the credit crunch.

"California and other states may be unable to obtain the necessary level of financing to maintain government operations and may be forced to turn to the federal treasury for short-term financing," said Schwarzenegger in a letter to the treasury secretary, Henry Paulson.