Markets dip as bailout drags on

The financial markets have reacted negatively as the US government rescue plan for the financial sector makes slow progress through Congress.

US Treasury Secretary Henry Paulson announced the proposal on Friday, which will request funds from Congress to purchase $700 billion of devalued assets from the balance sheets of US financial institutions.

Paulson and President Bush have called for Congress to pass the rescue bill as swiftly and cleanly as possible. However, reaction has been varied, with several additional proposals emerging. These include tighter monitoring of the bailout, pay limits for executives of firms seeking help and changes to bankruptcy laws that would let judges adjust the terms of mortgages.

The democratic senator of Rhode Island, Jack Reid, put forward the idea that the government should be allowed to buy equity in the firms participating in the scheme. “Taxpayers should not be forced to assume all the risk and then let the companies get all the reward. That is not fair in any kind of deal. The focus should be on taxpayer protection and reimbursement,” he commented.

Meanwhile, US Senate Majority Leader Harry Reid, the Democratic senator for Nevada, accepted the need to legislate quickly, but said: “we want to make sure there’s some accountability, there’s some oversight, and that the people who caused all the problems don’t get huge golden parachutes.”

Although the market initially reacted positively on Friday (September 19) when details of the bail-out were announced, the increasing likelihood of delays to its implementation led to stock prices falling and credit default swap (CDS) spreads widening on Monday.

The benchmark S&P 500 index dropped to 1207.09 by close of play on Monday, after climbing to 1255.08 on Friday from 1206.51 on September 18. The Dow Jones Stoxx 50 also fell to 3000.96 on Monday from 3022.83 on September 19 .

The Markit CDX North America CDS index widened to 745.96 basis points from 719.16bp on September 19, having tightened from 766.20bp the day before. The Markit Itraxx Europe CDS index bucked the trend however; tightening to 104.62bp yesterday, from 112.83bp on September 19 and 132.06bp on September 18.

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