The United States appealed for patience as world leaders raced to stabilize financial markets and avert the deepest global recession in decades, but the IMF said more steps would be needed in the coming months.

“Intensifying solvency concerns about a number of the largest U.S.-based and European financial institutions have pushed the global financial system to the brink of systemic meltdown,” IMF chief Dominique Strauss-Kahn said.

President George W. Bush huddled with Group of Seven economic chiefs and officials from the IMF and World Bank, and said top industrial nations grasped the gravity of the crisis and would work together to solve it.

“I’m confident that the world’s major economies can overcome the challenges we face,” Bush said, adding that Washington was working as fast as possible to implement a $700 billion financial bailout package approved a week ago.

“The benefits will not be realized overnight, but as these actions take effect, they will help restore stability to our markets and confidence to our financial institutions.”

Confidence has been in short supply and panic has swept through global markets, driving stocks to a five-year low on Friday and prompting banks to hoard cash. That has choked off lending to businesses and households, threatening to turn a global economic slowdown into a dangerously deep recession.

U.S. Treasury Secretary Henry Paulson said risks to the global economy were “the most serious and challenging in recent memory.” 

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“The recent slowing in the rate of decline in U.S. home prices is the first positive note in this now yearlong trauma,'' Greenspan wrote in the article for Emerging Markets, a publication issued for this weekend's Group of Seven and International Monetary Fund meetings in Washington.

“More conclusive signs of pending home price stability are likely to become visible in the first half of 2009,'' he wrote.

The credit-market freeze will eventually thaw as “frightened investors take tentative steps towards reengagement with risk,'' the former Fed chairman said, without specifying a time frame instant cash advance. He praised the actions of governments in buying up toxic assets and recapitalizing banks.

Treasury Secretary Henry Paulson is pursuing a Congress- approved $700 billion rescue plan and the government may buy stakes in several banks within weeks. Iceland's government seized the island's top three banks this week after the banking system imploded. The U.K. government agreed to invest 50 billion pounds ($87 billion) Oct. 8 to boost capital in the nation's banks to unlock credit markets.

Source

The MSCI Asia Pacific Index fell 7.5 percent today for a 42 percent decline this year. Indonesia halted stock trading after the benchmark index tumbled 10 percent. South Korea's won slid 4.8 percent to the lowest since 1997, when the nation took out a $57 billion loan from the IMF to meet overseas debt payments.

“None of the economies are likely to experience the same kind of downturn to the same degree that you saw during the Asian crisis,'' said Duncan Wooldridge, a Hong Kong-based economist at UBS AG, citing the region's foreign-currency holdings and absence of “huge'' current-account deficits.

The Asian financial crisis, set off in 1997 by plunging currencies, forced government to raise interest rates to limit capital outflows and caused companies to buckle under billions of dollars of debt. The region has since accumulated more than $3 trillion of reserves, more than half of the global total.

Today's market rout wasn't confined to countries pummeled in 1997. Japan's Nikkei 225 Stock Average fell 9.4 percent, the sharpest drop in two decades. Australia's dollar declined 7.4 percent against the U.S. currency.

`Recession-Like' Growth

Asia faces “recession-like'' growth in 2009 because slumping stocks will depress business and consumer spending, already being hurt by a drop in exports to the U.S., Europe and Japan, Wooldridge said. UBS yesterday cut its growth forecast for Asia excluding Japan to 6.1 percent from 6.9 percent.

Indonesia's stock exchange halted trading for the first time in eight years after the benchmark index plunged 10 percent, the biggest decline since 1998.

“We need to give enough time to the market to digest information rationally,'' Ahmad Fuad Rahmany, chairman of Indonesia's capital market regulator, said in a mobile-phone text message. “It's justified for us to suspend'' trading if the index falls more than 20 percent in just three days, he said.

Indonesia's currency fell 1.4 percent against the dollar today, taking its drop this month to 4.1 percent.

The rush to sell stocks comes amid relatively buoyant economic growth. Indonesia's gross domestic product unexpectedly accelerated to 6.4 percent in the second quarter as rising prices and demand for the nation's coal, palm oil and rubber pushed exports to a record. Growth will probably cool as commodity prices recede.

`Nobody Is Immune'

“Indonesia is simply buffeted by external forces to which nobody is immune at a time when global liquidity is drying up and risk aversion is increasing,'' Agost Benard, associate director at Standard & Poor's in Singapore, said in an interview with Bloomberg Television yesterday (pay day loans).

In Thailand, the SET Index fell 6.9 percent to the lowest since 1993. The growth outlook in Asia's second-largest economy is worsening after protesters vowed to step up efforts to oust the government following violent clashes with police yesterday.

The Thai central bank kept interest rates at a 16-month high of 3.75 percent after two increases since July. The baht, Asia's third-worst performing currency this year, fell 0.2 percent to 34.54 per dollar at of 2:42 p.m. in Bangkok. The currency is close to its lowest level since February 2007.

Thailand's banks have enough capital to withstand the world credit crisis, said Vincent Milton, managing director of Fitch Ratings in Bangkok.

“You don't have the structural imbalances'' of 1997, Milton said. “The capital position of most Thai banks is stronger than lenders anywhere, because they are risk averse and moderate economic growth means there's been no run up on the loan books.''

Won's Slide

South Korea's currency slid to the lowest in a decade today as a seizure in global credit markets forced banks and companies to sell the currency to meet their dollar-financing requirements.

The slump has been exacerbated by a global shortage of dollars and by South Korea's current-account deficit, according to Goohoon Kwon, economist at Goldman Sachs Group Inc. in Seoul.

“Korea is the only major country in the region with a current-account deficit, so there's no money coming in,'' Kwon said. The shortfall stands at about 1.5 percent of gross domestic product, down from 3 percent during the financial crisis.

The deficit could change to a surplus “very quickly'' as the drop in oil prices shaves the import bill, Kwon said. A 10 percent decline in crude would lower the deficit, which was a record $4.7 billion in August, by about $1 billion a month, he said.

South Korea has said it is willing to use the nation's foreign-exchange reserves to ease the currency shortage. South Korea has accumulated $243.2 billion in foreign reserves. They plunged to $7.3 billion in November 1997 as the government made an unsuccessful attempt to prop up the won.

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There appeared to be little support for suggestions from France and Italy that Europe create a U.S.-style bank rescue fund at yesterday's monthly meeting of euro-area finance ministers in Luxembourg.

Italian Prime Minister Silvio Berlusconi and French Finance Minister Christine Lagarde both have suggested a plan modeled after the $700 billion U.S. fund approved by Congress last week. The meeting ended yesterday without consensus on anything beyond a reiteration of a promise by heads of state to protect deposits.

“We all agreed that we want to do all we can to avoid financial institutions of systemic importance failing,'' Luxembourg Finance Minister Jean-Claude Juncker said after leading the meeting. “We reinforced arrangements concerning deposit protection.''

Officials in countries across Europe, mostly acting unilaterally, are rushing to rescue banks on the brink of collapse as the global credit squeeze bears down on the continent. Europe's Dow Jones Stoxx 600 Index had its steepest decline in two decades yesterday and the euro fell below $1.35 against the dollar for the first time in more than a year.

`Going Their Own Way'

“As far as I can tell, everyone's going their own way,'' said Peter Dixon, an economist at Commerzbank AG in London. “They can give blanket guarantees. They're almost meaningless, because depositors weren't going to lose money anyway. But it does take some of the heat out of the system.''

Before yesterday's meeting, European Union leaders pledged to protect depositors from losing their savings to bolster confidence as share prices tumbled.

EU countries “will take whatever measures are necessary to maintain the stability of the financial system,'' the 27 EU member countries said in a joint statement that was released by Berlusconi's office. “We will continue to take the necessary measures to protect the system so that individual depositors in our countries' banks do not suffer any loss of money.''

That statement followed earlier pledges by German Chancellor Angela Merkel and French President Nicolas Sarkozy to guarantee savings accounts.

Bailout Fund

Berlusconi two days ago said Italy would propose that EU governments contribute 3 percent of gross domestic product to a bailout fund to guarantee deposits at European banks. He said that other leaders were warming up to the idea. Italy didn't present the proposal at yesterday's meeting.

France's Lagarde floated a similar proposal last week, telling the German newspaper Handelsblatt that a “rescue package'' was needed to help “smaller'' European states “threatened with a banking failure (cash loans).''

Germany shot down that idea, and Henri Guaino, a special adviser to Sarkozy, later distanced the president from Lagarde's proposal, saying in a telephone interview that “France has neither studied nor proposed a plan of that type.''

Differences between Germany and France were apparent again yesterday.

“Coordination between all of us is very important,'' said Lagarde said at yesterday's Luxembourg meeting. In Berlin, Merkel stressed that “each member country must tackle its own problems and we can't risk creating new dangers to the banking system.''

Limiting Fallout

The finance ministers yesterday achieved little beyond what the leaders of Europe's four biggest economies did this past weekend. At that summit, Germany, the U.K., France and Italy also failed to agree on a unified response, pledging instead to work together to limit the economic fallout, ease accounting rules and seek tougher financial regulations.

“We have discussed recapitalization, liquidity, also minimum deposits,'' Luxembourg Economy Minister Jeannot Krecke said in an interview with Bloomberg Television. “We have some kind of agreement on the deposits.''

Even that agreement was undermined by discord over a plan by Ireland to protect not only deposits in six local banks but also loans they have taken. The German government criticized the Irish measure as distorting the European market, with Deputy Finance Minister Joerg Asmussen calling it “a rescue umbrella that discriminates in the internal market.''

Discrimination

The European Central Bank said the Irish government should have “properly'' informed the EU before announcing the bank- guarantee plan. And EU Competition Commissioner Neelie Kroes asked Ireland to expand the measure to include non-Irish banks to comply with EU rules that prohibit discriminating in favor of domestic institutions.

“We've seen negative consequences if a country goes off on its own with unilateral action,'' EU Commissioner for Economic and Monetary Affairs Joaquin Almunia said in Luxembourg. “We need a clear, coordinated, European approach.''

The debate followed rescues of major European institutions in recent days. Amsterdam- and Brussels-based Fortis, Dexia SA, which is based in Brussels and Paris, and Hypo Real Estate Holding AG of Germany required lifelines to avoid collapse.

The Stoxx 600 sank 7.6 percent to 241.6 yesterday, the steepest retreat since October 1987. Europe's plunge helped erase about $2.5 trillion from global equities as investors disregarded the U.S. Treasury plan to revive credit markets with a $700 billion bank bailout.

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American International Group (AIG, Fortune 500) said it also would retain a majority stake in its foreign life insurance operations.

Everything else is on the table, said Chief Executive Edward Liddy, who was installed by the Federal Reserve last month after it gave AIG an $85 billion loan. Other businesses include its aircraft leasing unit, asset management division, retirement services and U.S. life insurance operations.

Liddy gave an upbeat presentation to analysts, saying the company will end up strong and nimble after the asset sales.

"We fully expect to emerge from this with a capital structure that’s fit to fight," said Liddy in a conference call, noting the property and casualty businesses generated $40 billion in 2007 revenue. "Our insurance businesses…are strong and well-capitalized. Our policyholders are secure."

Liddy said the company has "already been contacted by numerous strong, stable parties, and we expect that buyers will recognize the value of these properties."

He did not provide a price estimate, but noted the $700 billion government bailout of troubled assets will help stabilize the firm.

The goal is to divest these units in larger transactions to brand-name companies, he said. If AIG gets good bids, it will sell fewer assets.

Potential bidders include Berkshire Hathaway, Allstate, State Life, MetLife and Manulife, as well as some European insurers, said CreditSights, a debt analysis firm.

First to hit the market will likely be units tied to airline leasing and consumer lending, both of which require funding from the debt markets, which is hard to come by these days.

International Lease Finance Corp. could command more than $7 billion and American General Finance Corp. will likely bring in about $2 billion, according to CreditSights.

While Liddy was very reassuring on the call, some analysts said his talk was mainly hype. As the financial turmoil continues, it’s hard to say how successful the asset sales will be.

"They don’t know what they are going to get," said David Schiff, founder of Schiff Insurance Observer, a newsletter.

Ratings agency Standard and Poor’s wasn’t impressed either. It placed AIG and its guaranteed subsidiaries in its financial-services division - such as the airline leasing company - on CreditWatch negative (best payday loan).

"The current disruption in the credit markets could make it difficult to sell businesses at attractive valuations," S&P said.

CreditSights valued the units AIG planned to sell at $32.9 billion and the divisions it will keep at $86 billion. These figures do not include the sale of a minority stake in its foreign life insurance operations, valued at $133.1 billion.

Once AIG sells its assets, it faces many hurdles in stabilizing its property and casualty insurance divisions. Customers are already fleeing and rivals are swooping in, experts said.

"The next challenge will be getting the core insurance business back on track, keeping the existing business and bringing in new customers," said Stewart Johnson, portfolio manager with Philo Smith, an investment bank. "Given the competitive nature of the industry, it will be tough without giving incentives."

AIG said it has drawn $61 billion in credit from the Federal Reserve as of Sept. 30. About $54 billion of it went to boost collateral at its troubled securities lending business, which is being wound down, Liddy said.

AIG’s stock rose more than 20% - to just under $5 - in afternoon trading Friday.

AIG’s downfall was due in large part to a small financial services unit in London, which prospered for years issuing credit default swaps, which insure against corporate debt defaults. With the global titan on the brink of bankruptcy a day after being downgraded by credit rating agencies, the Fed stepped up with a $85 billion loan carrying a steep interest rate, currently 12.83%. In exchange, the government took control of nearly 80% of the company.

The purpose of the loan, according to the Fed, was to help AIG to sell off its $1.1 trillion worth of assets in an "orderly manner, with the least possible disruption to the overall economy." And with the financial industry in chaos, the company needs the time so it won’t have to divest at firesale prices.

Based on the call, Liddy clearly intends to keep the company operating. In a nod to past complaints of AIG’s radio silence during troubled times, Liddy promised the company would be more forthcoming about its plans.

"Our communications and transparency will be second to none going forward," he said.

CNNMoney.com Staff Writer Aaron Smith contributed to this report. 

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Ingersoll-Rand Co. and Parker Hannifin Corp. slid more than 3.6 percent on Citigroup Inc. analysts’ prediction that credit losses will delay spending on equipment. GE dropped as much as 9.8 percent as Deutsche Bank AG said profit will be hurt by "deterioration" at its financial unit, then trimmed losses on plans to raise $15 billion from Buffett and others.

Benchmark indexes pared their declines as Bank of America and Citigroup climbed more than 8 percent on speculation Congress will approve the $700 billion financial-rescue plan.

The Standard & Poor’s 500 index retreated 5.3 points to 1,161.06, extending its biggest monthly drop in six years. The Dow Jones industrial average slipped 19.59 to 10,831.07. The Nasdaq composite index fell 22.48 to 2,069.4.

The benchmark index for U.S. equities jumped the most in six years yesterday as expectations grew that lawmakers will salvage the proposal to buy bad loans from banks. Even with Tuesday’s advance, the S&P 500 had its worst month since 2002 in September, declining 9.1 percent, and tumbled 8.9 percent for the third quarter.

Ingersoll-Rand, the maker of Thermo King and Hussmann refrigeration equipment, dropped $1.71, or 5.5 percent, to $29.46. Parker Hannifin, the world’s largest maker of hydraulic equipment, lost $1.91, or 3.6 percent, to $51.09. Citigroup cut the companies to "hold" from "buy," citing a business slowdown.

"More important than the bailout plan will be next year’s economy," said Marc Faber, managing director of Marc Faber Ltd. and publisher of the Gloom, Boom & Doom Report "I would rather sell on strength."

GE lost $1, or 3.9 percent, to $24.50, leading industrial companies in the S&P 500 to a decline of 2.6 percent, the biggest retreat among 10 groups. Deutsche Bank analysts cut their 2008 earnings estimate 9 percent to $2 a share and their 2009 profit projection to $1.95 a share. The worsening conditions at GE Capital is "driven by tighter credit markets, asset shrinkage and debt pay-down," analyst Nigel Coe wrote in a research note.

"We also eased back our industrial assumptions," Coe said.

Credit default swaps, contracts to protect against a default by GE Capital, which has a AAA rating, jumped to a record.

"We see no reason for the defaults widening," GE said in a statement. The company said its commercial-paper funding "has gone smoothly," and "we have over-funded every day."

Life insurers fell on concern declines in stocks and bonds will cause increased investment losses. MetLife Inc. dropped 14 percent to $48.15. Hartford Financial Services Group Inc. slipped 7 percent to $38.11. Principal Financial Group Inc. retreated 13 percent to $37.64. Phoenix Cos. slumped 18 percent to $7.59.

Berkshire Hathaway Inc. climbed 4.9 percent to $137,000 after GE said Buffett’s company will buy a $3 billion stake in preferred shares that pay an annual dividend of 10 percent and can be purchased back by the company at a 10 percent premium after three years.

"If you’re an entity with cash available, and not cash you have to borrow, there are some real opportunities in this market," said Mark Freeman, a money manager at Westwood Management Corp. in Dallas, which oversees $8 billion. "However, the number of participants that have that ability is fairly limited. There’s no shortage of sellers and very few buyers."

SLM Corp., the biggest U.S. student lender, fell the most in the S&P 500, losing $3.99 to $8.35. The cost to protect against the company’s default reached a record Tuesday as short-term corporate borrowing rates soared amid the worst financial crisis since the Great Depression.

IBM Corp. fell $6.83, or 5.8 percent, to $110.13, the steepest decline in the Dow average. Sanford C. Bernstein analysts said the increased risk of customers failing to pay their bills could hurt profit at the world’s second-largest software maker.

Ford Motor Co. dropped 65 cents, or 13 percent, to $4.55. The second-largest U.S. automaker said second-half profit at its European unit will decline on sagging demand for new vehicles and rising raw-material costs.

Peabody Energy Corp. tumbled 8.8 percent to $41.05. Cabot Oil & Gas slid $2.31 to $33.83 as the S&P 500 energy index tumbled 1.7 percent. Crude for November delivery fell $2.11, or 2.1 percent, to $98.53 a barrel. Prices are down 33 percent from the record $147.27 a barrel reached on July 11.

Citigroup climbed $2.49, or 12 percent, to $23 and Bank of America added $3.13, or 8.9 percent, to $38.13.

The paralysis in credit markets is changing how U.S. companies do business as banks pull back on loans or make them prohibitively expensive. Some companies are closing plants and stores, postponing takeovers and grabbing any available credit in a fight for survival.

Carmike Cinemas Inc., the third-largest U.S. theater chain by screens, suspended its dividend, while Duke Energy Corp., owner of utilities in five U.S. states, tapped $1 billion from a credit agreement and RC2 Corp., the maker of infant and preschool products, canceled an acquisition.

National City Corp. gained the most in the S&P 500, rising $1.14, or 65 percent, to $2.89 on speculation Ohio’s biggest bank may be acquired. Huntington Bancshares Inc. rose $1.81, or 23 percent, to $9.80. Sovereign Bancorp Inc., the second-largest U.S. savings and loan, increased 22 percent to $4.82. First Horizon National Corp., Tennessee’s biggest bank, rose 20 percent to $11.24.

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The legislation, approved last night on a 74-25 vote, authorizes the government to buy troubled assets from financial institutions rocked by record home foreclosures. It contains two provisions favored by House Republicans: One raises the limit on federal bank-deposit insurance; the other reiterates the authority of securities regulators to suspend asset-valuing rules that corporate executives blame for fueling the crisis.

The bill's proponents cited the record 778-point drop in the Dow Jones Industrial Average after the House's 228-205 defeat of the legislation Sept. 29 as evidence of the urgency to stabilize the banking system. They suggested that the market reaction may spur some House Republicans to change their minds when the bill comes to a vote, likely tomorrow afternoon.

“The big drop'' in the Dow Index “really had a chilling effect on a lot of our members and a lot of their constituents,'' House Republican Leader John Boehner said on Fox News. With changes made by the Senate, the legislation “has a much better chance'' of passage this time, he said.

`Signal to Markets'

Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, said he hoped the vote “will send a very strong signal even to the Asian markets and others.''

The dollar rose against the euro, approaching a one-year high, after the Senate approval, bolstering expectations the U.S. will act faster than Europe to address the seizure in credit markets. The dollar advanced to $1.3883 per euro at 12:46 p.m. in London, from $1.4009 late yesterday in New York.

Asian stocks and U.S. futures fell on concern the package won't be enough to avert a recession, with futures on the Standard & Poor's 500 Index falling 1.1 percent and the MSCI Asia Pacific Index lost 1.3 percent. Europe's Dow Jones Stoxx 600 Index added 1.2 percent to 260.75 as of 12:46 p.m. in London.

The extra measures may help sway some Republicans.

“They only need 12 votes,'' Kansas Representative Todd Tiahrt, who voted against the bailout, said in an interview with Bloomberg Television. “If they put these few fundamental reforms in there,'' congressional leaders “would easily get enough votes to pass the legislation'' he said before the Senate included those provisions in the package.

Targeting Lawmakers

Democratic supporters of the bill are targeting lawmakers such as Illinois Representative Bobby Rush, who twice changed his vote in the House roll call. Rush ended up being among the 21 members of the Congressional Black Caucus to oppose the legislation. The caucus scheduled a meeting today to discuss the changes made by the Senate. Rush wasn't available to comment on his vote.

Still, House passage is far from certain.

House Majority Leader Steny Hoyer told MSNBC News yesterday that no Democrats who opposed the measure earlier this week have pledged to back it. “We don't have any more Democrats at this hour,'' he said.

Some Republicans said they also weren't budging.

“The bill that they are going to send back is the same bill that I voted against two days ago,'' Representative Joe Barton of Texas told Bloomberg Television. “Why would I turn around and vote for it tomorrow evening or Friday?''

Bush Presses for Passage

President George W. Bush said in a written statement after the vote that “the bill the Senate passed is essential to the financial security of every American.'' He said the House should follow suit in approving the proposal.

Bush is slated to meet with U.S. business representatives this morning, including members of the Chamber of Commerce and the National Association of Manufacturers, to urge their support in pushing for House passage, the White House press office said.

The bill was a bipartisan effort, with 40 Democrats, 33 Republicans and independent Joe Lieberman of Connecticut voting for it. The two presidential nominees, Democrat Barack Obama and Republican John McCain, returned from the campaign trail to vote for the plan.

The Senate also sweetened the measure for Republicans by authorizing the government's purchase of troubled assets with a $149 billion package of tax breaks. They would spare 24 million households from a $62 billion alternative minimum tax and extend $17 billion in benefits to companies that produce alternative energy.

Yet Hoyer warned there was a possibility that some additional Democrats may oppose the legislation because of the tax breaks, which aren't offset with spending cuts.

“There are people who are upset that we are making the deficit worse as we try to stabilize the economy,'' he told reporters. Hoyer said he was “personally disappointed' by the Senate's decision to include the tax legislation in the package.

Blue Dogs

Twenty-four of the 44-member Blue Dog Coalition of fiscally conservative Democrats voted for the rescue package on Sept. 29. Four of them said yesterday they'll continue to back the bill, even though their caucus derided the Senate's tax measures as irresponsible as recently as Monday.

“I will vote for the package coming from the Senate,'' said Oklahoma Representative Dan Boren. Other members of the coalition who voiced support included Representative Jane Harman of California, Representative Jim Marshall of Georgia and Representative Jim Cooper of Tennessee.

Added to the rescue plan this week is a temporary increase in the limit on federal deposit insurance to $250,000 from $100,000 aimed at discouraging people from pulling their money out of banks.

The Senate bill also reiterates the U.S. Securities and Exchange Commission's authority to suspend an accounting rule that bankers and other corporate executives say exacerbates their troubles.

Ease the Rule

The so-called fair-value standard requires companies to review assets and report losses if their values decline. Lawmakers, the American Bankers Association and companies including American International Group Inc. have urged the SEC to suspend or ease the rule, saying it forces firms to report deeper losses than needed on assets such as subprime mortgages.

Representative Rahm Emanuel of Illinois, the No. 4 House Democrat, said it was likely the Democratic vote total in the House will change.

“At the end of the day, I doubt we lose Democratic votes in total,'' Emanuel said. “We lose some and will pick up others. The question now will be how many Republicans come to the table to help solve this crisis.''

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The Bank of Japan added 1.2 trillion yen ($11.3 billion), helping lower the overnight call rate to 0.4 percent from 0.7 percent, the highest level since April 1, according to Tokyo Tanshi Co. Overnight U.S. interbank loan rates fell to 3.85 percent from as high as 7.3 percent earlier today in Tokyo.

“With news from Congress they will come up with a solution, the high anxiety of yesterday's open has been stripped out to an extent,'' said Peter Pontikis, a treasury strategist at Suncorp- Metway Ltd. in Brisbane. “A fear premium got locked.''

Central banks including the U.S. Federal Reserve and the European Central Bank are pumping billions into money markets to keep them functioning. The cost of borrowing in dollars overnight in London rose the most on record yesterday after Congress's rejection of Treasury Secretary Henry Paulson's plan caused an unprecedented squeeze in credit markets.

Senate Democrats and Republicans agreed to vote today on legislation that would give Paulson broad authority to buy troubled assets from financial companies.

Asian financial markets including China, Hong Kong and Singapore are closed today for holidays.

`Better Quality Assets'

The Reserve Bank of Australia injected A$4.67 billion ($3.7 billion) as one-month bank rates fell 0.285 percentage point to 7.1 percent at 3 p.m. in Sydney, the lowest since January.

The BOJ and RBA “will continue to intervene as much as is needed to maintain liquidity in inter-bank markets,'' said Guthrie Williamson, portfolio manager in Sydney at Principal Global Investors, which manages $244.9 billion in assets globally. “Banks are definitely more resilient in Japan and also in Australia because of better quality assets.''

Australian banks' borrowing costs fell from near the highest since Bear Stearns Cos. failed six months ago, according to a gauge that measures the availability of funds in the market. The difference between the rate banks charge each other for three-month loans and the overnight indexed swap rate stood at 62.5 basis points, from 97.67 points yesterday.

The rate that Japanese banks charge overseas lenders for overnight loans fell to 0.75 percent, from 1 percent yesterday, the highest since at least December.

Financial shares in Asia gained. Westpac Banking Corp., Australia's third-largest bank, rose 5.3 percent and Nomura Holdings Inc., Japan's largest brokerage, jumped 4.8 percent.

Credit Risk Drops

The cost of protecting investors in Japanese and Australian corporate bonds from default also declined. The Markit iTraxx Australia index fell 15 basis points to 185.5, Citigroup Inc. prices show. The benchmark is tied to the debt of 25 companies and drops as perceptions of credit quality improve. The Markit iTraxx Japan fell 6 to 158, according to Morgan Stanley.

The BOJ yesterday said Japan's banking industry has been resilient during the U.S. financial crisis, though slower economic growth at home is stalling profit growth.

“Japan's financial system, on the whole, has remained stable despite continued turmoil,'' the central bank said in its semi-annual Financial System Report released yesterday. “Credit risk has started to increase amid the sluggish economic growth, and future developments require vigilance.''

India, Korea

India's benchmark overnight borrowing rate climbed to an 18-month high of 17.5 percent, the most since March 2007, according to data compiled by Bloomberg.

The central bank should make more cash available to lenders to ease a credit shortage and restore investor confidence, executives at Alok Industries Ltd., Jaiprakash Associates Ltd. and Balrampur Chini Mills Ltd. have said.

South Korea's three-month interbank offered rate held at 7.15 percent yesterday, the highest since May 2002.

The nation plans to provide at least 4.3 trillion won ($3.6 billion) in extra loans to small and medium-sized companies struggling from higher costs.

The extra loans will be provided through state-controlled banks including Korea Development Bank and Industrial Bank of Korea, the Financial Services Commission said today in a statement. The government will ask the central bank to raise the limit on total loans to commercial banks, the regulator said.

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The Conference Board's confidence index increased to 59.8, a third consecutive increase, from 58.5 the prior month, the New York-based group said today. A separate report showed home prices fell in July at the fastest pace on record from a year earlier.

Since the confidence survey's Sept. 23 cutoff, the odds have risen that consumers will retrench in the wake of failing banks, evaporating wealth and paychecks that aren't keeping up with inflation. Stocks tumbled yesterday after the government failed to approve a financial-rescue plan.

“The environment has become pretty negative,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut, who had forecast confidence would rise. “The momentum has certainly turned down. If the turmoil continues, the risk of a severe recession goes up.''

Americans are likely to lose confidence heading into the presidential election on Nov. 4. Today's report is the next-to- last Conference Board sentiment reading before the vote.

Another report showed business activity slowed less than forecast this month. The National Association of Purchasing Management-Chicago's index fell to 56.7 in September from 57.9 the prior month. Fifty is the dividing line between growth and contraction.

Stocks Up

Stocks extended earlier gains following the reports and Treasury securities fell. The Standard & Poor's 500 index was up 3.2 percent to 1,142 at 10:15 a.m. in New York. The yield on the benchmark 10-year note rose to 3.69 percent from 3.58 percent late yesterday.

Equities rallied on expectations lawmakers would salvage the bank rescue package. The House of Representatives yesterday voted down a $700 billion plan intended to restore confidence in U.S. banks, sending the S&P 500 Index tumbling almost 9 percent.

The confidence gauge was forecast to drop to 55 from an originally reported 56.9 in August, according to the median forecast in a Bloomberg News survey of 62 economists. Projections ranged from 48 to 66. The index reached a 16-year low of 51 in June and averaged 103.4 last year.

Since the cutoff date, Washington Mutual Inc. joined Lehman Brothers Holdings Inc. in bankruptcy, Citigroup Inc. acquired Wachovia Corp. to prevent the collapse of the sixth-biggest U.S. bank by assets, and stocks suffered their biggest drop since 1987.

Home Values Drop

Earlier today, the S&P/Case-Shiller home-price index of 20 U.S. metropolitan areas dropped 16.3 percent in July from a year earlier, more than forecast, after a 15.9 percent decline in June. The gauge has fallen every month since January 2007, and year-over-year records began in 2001.

“The fact that house prices quickened their slide before the worst point in credit markets hit this month does not bode well,'' said Derek Holt, an economist at Scotia Capital Inc. in Toronto.

The Conference Board's measure of present conditions dropped to 58.8, the lowest since 1993, from 65 the prior month. The gauge of expectations for the next six months increased to 60.5 from 54.1.

“These results did not capture all of the tumultuous events in the financial sector this month,'' Lynn Franco, director of the Conference Board's confidence survey, said in a statement. “Until the dust settles a bit more, we will not know the full impact.''

Jobs Outlook

Temporary shocks usually have a detrimental effect on confidence for two to four months unless they are accompanied by job losses, she said.

The share of consumers who said jobs are plentiful dropped to 12.2 percent, the fewest in five years, from 13.5 percent last month, today's report showed. The proportion of people who said jobs are hard to get increased to 32.8 percent from 31.7 percent.

Compared with other sentiment measures, the Conference Board's index tends to be more influenced by consumer attitudes about the labor market, economists said. So far this month, 466,000 Americans a week on average filed first-time claims for unemployment benefits, up from 443,000 in August and 363,000 in the first six months of the year.

A report last week showed the Reuters/University of Michigan final sentiment reading for this month declined from a preliminary figure issued in early September as the credit crisis deepened. The reading was still up from August, reflecting the decline in gasoline prices, economists said.

Payroll Forecast

The economy probably lost another 105,000 jobs in September, the ninth consecutive monthly decline, according to the median estimate in a Bloomberg survey ahead of a Labor Department report due Oct. 3. Payrolls dropped by 605,000 workers in the first eight months of the year.

Job cuts may swell as the effects of the financial meltdown ripple through other industries. Fewer jobs and less-available credit indicate consumer spending, which accounts for more than two-thirds of the economy, will weaken further.

Fewer Americans were able to obtain an auto loan this month, according to CNW Marketing Research in Bandon, Oregon, which analyzes auto-industry data.

“Given the relatively weak state of the economy, that's obviously impacting the consumer's ability or willingness to come out and buy a new car,'' General Motors Corp. Chief Executive Officer Rick Wagoner said in a Bloomberg Radio interview on Sept. 25 from Flint, Michigan.

Consumer spending this quarter will be unchanged, the weakest performance since 1991, according to the median estimate in a Bloomberg survey earlier this month.

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But will Fishman follow the lead of another troubled financial firm and turn his severance package down?

JPMorgan Chase (JPM, Fortune 500) grabbed up the banking assets of WaMu on Thursday after federal regulators seized the company, making it the largest bank failure in history.

JPMorgan Chase CEO Jamie Dimon said in a conference call with reporters Friday that no decisions have been made about the fates of WaMu senior executives.

Still, the demise of WaMu is likely to be the end of Fishman’s brief tenure at the helm.

Fishman was hired on Sept. 7, replacing former long-time CEO Kerry Killinger, who was ousted as a result of the company’s many financial woes.

WaMu did not reply to requests for comment about Fishman’s severance package. But some details were outlined in his employment agreement, filed with the Securities and Exchange Commission on Sept. 11.

Fishman had a base annual salary of $1 million, which translates to $19,230 per week. So during his three weeks on the job, he would receive a base pay of about $60,000 before taxes.

His target annual bonus was 365% of his salary, or $3.65 million. In the agreement, it was unclear how much of the annual bonus he would be eligible for, if any.

The agreement said that Fishman could be eligible in 2009 for a long-term incentive award, which would be worth at least $8 million. But the agreement also said this is based on the assumption that would serve as CEO for the "full year" of 2009.

Also, if Fishman has to pay taxes because of any severance he receives as a result of the takeover, then the company would cover those taxes. That would potentially give Fishman millions of dollars more.

Fishman also got a multi-million dollar sign-on bonus. But he may have to pay it back, depending on certain conditions outlined in the agreement.

Fishman’s sign-on cash bonus was $7.5 million as well as 612,500 shares of WaMu, which are now virtually worthless. Shares of WaMu plunged more than 90% to 16 cents a share on Friday.

The agreement says that Fishman would have to pay back part or all of his bonus if he ends his employment for any reason other than "constructive termination," or if the company terminates his employment with "cause."

If Fishman is terminated without "cause" - which could mean the loss of a job due to a takeover of the firm - or if he resigns because of "constructive termination," than he would receive a lump severance payment of $6.15 million. This figure is 2.5 times his base salary of $1 million plus the maximum bonus of $3.65 million.

The agreement did not specify constructive termination, but it is generally characterized as an employee voluntarily quitting because of intolerable working conditions.

When you add up his salary, the possible bonuses and the lump sum payment, Fishman could walk away with more than $18 million.

But the CEO of another prominent financial firm in a similar situation recently decided to turn down his severance package after the firm essentially collapsed.

Robert Willumstad, former chief executive officer of insurance giant AIG (AIG, Fortune 500), which the government took an approximately 80% stake in after giving it an emergency $85 billion loan, was dismissed last week after only about three months on the job.

Willumstad has reportedly told his successor that he has decided not to accept his $22 million severance package since AIG shareholders and employees had lost so much money as a result of its meltdown.

Matt McCormick, portfolio manager with Bahl & Gaynor Investment Counsel, said he thinks that Fishman will not be rewarded extravagantly given that the bank failed.

"I will give WaMu the benefit of the doubt that they hired this person to make WaMu work, not to get foreclosed," he said.

But McCormick added that the WaMu failure wasn’t necessarily Fishman’s fault, because "their goose was cooked long ago."

In the future, employment agreements for CEOs might include more details on restricting multi-million dollar bailouts after brief tenures, McCormick said. 

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