Congress passes bailout, Bush signs into law

NEW YORK/WASHINGTON (Reuters) - The Congress approved a $700 billion bailout package for U.S. banks as efforts to head off a spreading global financial crisis hung in the balance.

The U.S. House of Representatives approved the financial rescue plan by a vote of 263-171. That vote sent the measure to U.S. President George W. Bush, who quickly signed it into law, concluding two weeks of haggling in Washington that had roiled and captivated global markets.

Markets pivoted on passage of the bailout, with stocks drifting from highs and the dollar slipping as the focus began to shift from the immediate response to the financial crisis to signs of a gathering recession.

"This probably comes a bit too late. If this had been done earlier, it probably would have had a much bigger impact in restoring confidence," said Anna Piretti, economist at BNP Paribas in New York. "Over the past two weeks what we have seen is an accumulation of weak reports."

Earlier, the hobbled financial sector was bolstered as Wells Fargo & Co stepped in to buy Wachovia Corp.

But in signs of the spreading crisis, California said it was running out of money, France said the world stood on the "edge of the abyss" and European leaders divided over their response to the banking sector's difficulties.

U.S. Treasury Secretary Henry Paulson, who had been the administration's chief lobbyist for the plan, said regulators would get going quickly to implement the emergency power to start buying up distressed assets from banks.

"We have shown the world that the United States of America will stabilize our financial markets and maintain a leading role in the global economy," Bush said in a short statement delivered before cameras outside the White House.

The House had shocked world markets on Monday by rejecting a previous draft. With elections on November 4, lawmakers from both parties were wary of voter backlash in asking taxpayers to pay for Wall Street's mistakes.

On Friday, speaker after speaker from both parties on the House floor said rejecting the bailout could have devastating consequences for an already slowing U.S. economy, arguing the bill was as important for small businesses, homeowners, students and pensioners as it was for the financial sector.

"While the focus has been on the Dow Jones and Wall Street, we are addressing the real pain felt by Mr. and Mrs. Jones on Main Street," said House Speaker Nancy Pelosi, a California Democrat.

Ahead of the vote, U.S. stocks had risen on hopes for the bailout plan and the deal to buy Wachovia.

Wells Fargo, one of the strongest U.S. banks, said it did not need the government help that Citigroup Inc required in an earlier effort to rescue Wachovia.

Earlier on Friday, the United States reported its biggest monthly job loss in 5-1/2 years, more evidence of an approaching recession. Data showed the U.S. services sector holding up.

In California, Gov. Arnold Schwarzenegger warned the U.S. Treasury that the nation's most populous and richest state could need short-term federal loans because it has been shut out of frozen credit markets.

California, a state with an economy on par with Spain's, warned that its cash reserves could be exhausted by end month, bringing state services to a grinding halt.

"The economic fallout from this national credit crisis continues to drain state tax coffers," Schwarzenegger said in a letter to Paulson.

A collapse in the U.S. housing market and resulting bad mortgages have shattered confidence in the financial sector, with banks across the United States and Europe needing support from governments or outside investors this week.

Interbank lending and credit to businesses and private individuals has all but seized up. Central banks have injected billions of dollars to maintain some flow of funds.

'ON THE EDGE OF THE ABYSS'

French Prime Minister Francois Fillon, whose country is hosting an emergency summit with Italian, British and German leaders on Saturday, said only collective action could solve the financial crisis. He said he would not rule out any solution to stop any bank failing.

"The world is on the edge of the abyss because of an irresponsible system," Fillon said, alluding to widespread anger over past lax regulation of financial markets and excessive lending.

Fillon said President Nicolas Sarkozy would propose at the emergency meeting measures to unfreeze credit and coordinate economic and monetary strategies.

In Britain, Prime Minister Gordon Brown shook up his cabinet and authorities took three separate steps to try to shore up the financial system.

Bad news mounted in the European financial sector.

Dutch-Belgian banking and insurance giant Fortis was broken up on national lines, with the Dutch government taking over its operations in the Netherlands, after an earlier rescue effort and asset sale failed.

In Switzerland, UBS AG, hardest hit among European banks by its exposure to subprime-related holdings, said it would cut 2,000 investment banking jobs -- on top of the 4,100 positions cut in the past year.

Worries grew that even if Washington agrees on the package, it will not be enough to resolve deeper-rooted weakness in the global economy.

Divisions have emerged within Europe over the past week, with Ireland offering guarantees on bank deposits, prompting a flight of capital from British lenders to Irish banks, and Greece promising to safeguard savers' cash.

EU partners said Ireland's move could break competition rules and threatened the unity necessary to ensure an ordered approach to turmoil ahead.