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US congress promises quick action on bailout package

(Agencies)
Updated: 2008-09-19 17:09

The roots of the current crisis can be traced to lax lending for home mortgages, especially subprime loans given to borrowers with tarnished credit, during the housing boom. Lenders and borrowers were counting on home prices to keep zooming upward. But when the housing market went bust, home prices plummeted. Foreclosures spiked as people were left owing more on their mortgage than their home was worth. Rising mortgage rates also clobbered some homeowners.

A worker uses a measuring tape while building a new home at a housing development in 2007 in Richmond, California. US housing starts slid 6.2 percent in August to a fresh 17-year low, government data showed Wednesday in a sign that the punishing correction in the real estate market is not over. [Agencies]

As financial companies racked up multibillion-dollar losses on soured mortgage investments, and credit problems spread globally, firms hoarded cash and clamped down on lending. That crimped consumer and business spending, dragging down the national economy, a vicious cycle policymakers have been trying to break.

Related readings:  Fed prepares to play larger role  AIG, facing liquidity crisis, seeks Fed lifeline  Fed moves to deal with financial crisis  Reports: US Fed expected to hold steady on rates

"The root cause of the stress in the capital markets is the real estate correction," Paulson said, adding he hopes to have a solution "aimed right at the heart of this problem."

The federal government already has pledged more than $600 billion in the past year to bail out, or help bail out, some of the biggest names in American finance. There was no immediate word on how much the new rescue plan might cost.

Paulson, Fed Chairman Ben Bernanke and other officials planned to work through the weekend on a solution.

Christopher Cox, chairman of the Securities and Exchange Commission, told lawmakers the SEC may put in a temporary emergency ban on all short-selling, according to a person familiar with the matter, speaking on condition of anonymity because no final decision had been made. Short-selling, which has been practiced on Wall Street for decades, is not illegal per se.

For more than a year, investors around the world have watched with growing alarm as the US economy, the world's largest, has struggled to right itself amid massive home foreclosures, many of them from mortgages issued to homeowners with bad credit.

The turmoil has swallowed some of the most storied names on Wall Street. Three of its five major investment banks, Bear Stearns, Lehman Brothers and Merrill Lynch, have either gone out of business or been driven into the arms of another bank.

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