THE $840 billion bailout of US banks has been rejected by US politicians, wiping tens of billions of dollars off Wall Street and threatening to do the same when the Australian market opens.
The plan, only agreed yesterday after a week of back and forth, was voted down this morning, sending markets into a panic. Wall St`s losses were even bigger than the falls suffered after the September 11 terrorist attacks.
Traders watched the politicians reject the package, then erupted into frenzied selling as what has been described as "Wall Street`s worst fears" came true.
Experts are saying that while the markets were not really convinced by the mega-bailout in the first place, the fact that it could not even pass its first vote means there could be no end in sight to the world financial crisis.
"It is unclear what the next step will be. It took days of painstaking negotiations to put together the deal, and congressional leaders and administration officials may have to go back to the drawing board,`` said Augustine Faucher at Economy.com.
"The US is looking at a severe recession if Congress fails to pass some sort of package.``
For Australians, it means that the slim hope of banks independently lowering interest rates have disappeared for the time being. It was thought the package could have made borrowing cheaper for banks, which would then pass on those savings to customers.
It also raises the chances that the banks will cling to their current rates even if the Reserve Bank lowers the official rate when it meets next week.
Why the bailout was needed
Years of easy credit, where banks and other lenders made loans they knew couldn’t be repaid finally caught up with the US financial system this year.
Many US banks hold bonds, which are backed by mortgages – many of these mortgages are in default, making the bonds worthless . Under the bailout plan $US700 billion of taxpayers’ money would be used to buy these distressed bonds.
But even when US political leaders agreed on the package yesterday, traders knew nothing was final until it was voted on.
When it was clear it would be defeated, the plunge began. The Dow Jones Industrial Average sank 770.59 points (6.92 per cent) to 10,372.54 after the closing bell in the worst single-day point decline ever, based on provisional data at the close of trade.
The slide eclipsed a 684-point drop on September 17, 2001, when the markets reopened following the September 11 terror attacks.
"It takes an incredible amount of fear to set off such an intense reaction on Wall Street," one business writer said after watching the fall. "The worry now is that with the ... plan`s fate uncertain, noone knows how the financial sector hobbled by hundreds of billions of dollars in bad mortgage bets will recover."
What Bin Laden couldn't do on 9/11, the US have managed to do to themselves. All he had to do was wait! Maybe next time we will borrow what we can afford to pay back.
Posted by: Barry of Canberra 8:19am today
Maybe Kevin747 should be on his way back over to the US.After all, his words of wisdom were clearly adopted from his keynote at the UN last week.Question, why if Australia's exposure to the US crisis has been well documented by the big banks to be less than a few $B and why with such a surplus and with most of our commodoties exporting to Asia are we going to see a massive hit today on the All Ords?It is time we remove ourselves from being in the USA back pocket and start to stand on our own two feet as a rich nation.The USA should no longer dictate our every move as a country and therefore should only have a proportional influence on our share markets, not a COMPLETE influence.
Posted by: Super sufferer of retirement land 8:17am today
The US Republican party - headed by McCain (mute, during the crisis talks) have just damaged the World economy for a very, very, very long time... They're holding the World to ransom for their own political ends and now we're all going to pay quite dearly! The 'Great Depression' will look like a party, compared to what is about to unfold if the crisis bill is not passed through the House of Representatives very, very soon! If you have any religious beliefs, start praying for a decent outcome...
We welcome your comments on this story. Comments are submitted for possible publication on the condition that they may be edited. Please provide your full name. We also require a working email address - not for publication, but for verification. The location field is optional.Read our publication guidelines.
Submit your feedback here:
Search for more stories on this topic on Newstext, our news archive service. Click here
