Haggling over a $700 billion bailout to tackle the worst US financial crisis since the Great Depression looked set to drag into next week, threatening to keep markets on tenterhooks over the shape of the Wall Street rescue.
Asian stocks fell, the dollar dipped and US government bonds edged up, after a night of negotiations among lawmakers about how to make Wall Street pay for the plan that lets the USTreasury buy up toxic mortgage-related debt.
Singapore's sovereign wealth fund GIC echoed market caution.
“We should not assume that the worst is over and we continue to be watchful and prudent,” said Tony Tan, deputy chairman of the fund which manages assets estimated at $300 billion.
Without waiting for the bailout to take shape, US financial institutions kept up efforts to secure their future.
On Monday, Morgan Stanley struck a deal with Mitsubishi UFJ Financial Group Inc making Japan's biggest bank a major shareholder in the 73-year-old Wall Street institution.
Under the deal MUFG will pay up to $8.5 billion for about a fifth of the US bank.
Morgan Stanley and Goldman Sachs have given up their investment bank status to come under the wings of the Federal Reserve, together with its oversight and greater access to funds, to avoid the fate of rivals that collapsed or were sold in the meltdown of recent weeks. The two institutions were the last of the big five investment banks that shaped 20 years of Wall Street history, after the collapse of Bear Stearns and Lehman Brothers and the takeover of Merrill Lynch.
As bank holding companies they will now face a thicket of new regulations, which will bolster their resources but also curb the spectacular profit growth that made investment bankers among the highest paid in the nation.
The investment banking model effectively died in one dramatic week on Wall Street that saw panic-stricken investors drive Lehman Brothers to bankruptcy, Merrill Lynch into the arms of Bank of America and insurer AIG to a US government bailout.
AIG shares, however, gained 23% on Monday on reports its investors were hatching a plan to prevent the insurer from falling into government ownership, by repaying the Fed's $85 billion loan that bankrolled its rescue.
With the economy the No. 1 issue in a US presidential election that is about six weeks away, lawmakers want a bailout plan in place quickly, fearing delay could send markets reeling again.
US Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke start two days of congressional hearings on Tuesday to hasten approval of the bailout.
But lawmakers, many also facing elections on November 4, are reluctant to merely rubber stamp the Bush administration's plan and are odds with the Treasury over several issues, suggesting the end of the week deadline may prove unrealistic.
“We are not sending a blank check to Wall Street,” House Speaker Nancy Pelosi said after holding bipartisan talks.
Democrats, who control both chambers of Congress, said the White House has agreed to create an oversight board to monitor the bailout, one if their key demands.
But compensation caps for executives of rescued companies remained a divisive and highly emotional issue. Sources close to Treasury told Reuters that it opposed a Democrat proposal for the US government to take equity stakes in the companies seeking rescue.
The crisis, triggered by a US sub-prime mortgage market meltdown 13 months ago, has unsettled world markets, and the Group of Seven of rich nations promised “heightened close cooperation” to safeguard the global economy.
Fears that a Wall Street meltdown that would drag the US economy into severe recession triggered a funding squeeze in money markets - the lifeblood of the financial system - and prompted central banks to dish out billions of dollars in emergency funds.
There were signs on Tuesday that the crunch was easing.
“The market is still jittery, but all the injected liquidity by central banks in the past few days helps,” a trader in Singapore said. Overnight dollar funds traded at 2.5%-3.25% in Asia coming off a peak of 10% hit last week, though still above the Fed's 2% target.
Australia's central bank effectively drained funds from the money market on Tuesday after last week's heavy injections and Indonesia said that its money market had now sufficient funds after weeks of tight.
But doubts about the bailout plan and fears of recession in the world's biggest economy forced stock markets into a retreat.
With Tokyo closed for a holiday, stock markets in Asia-Pacific fell 1.7% and US stocks surrendered most of the gains seen on Friday, when word of the plan sparked Wall Street's best one-day gain since 1987. The S&P 500 index fell 3.8%. (Reuters)