Janet Whitman, Financial Post Published: Saturday, October 04, 2008

Mike Theiler/ReutersU.S. President George W. Bush signs the Emergency Economic Stabilization Act of 2008 in the Oval Office after the House passed the US$700-billion financial rescue legislation in Washington on Friday.

NEW YORK - Elmer Tabor, chairman of a small community bank in Cape Coral, Fla., doesn't believe his ailing bank will see one penny of the US$700-billion bailout for the U. S. financial system. But he's relieved the legislation is finally getting passed.

"I'm hopeful this bill will help restore customer confidence in banks as a whole," said Mr. Tabor, chairman of Riverside Bank. "We've got to get that turned around. Right now the only people making money are hardware stores because people are buying shovels to bury the money they're taking out of the bank."

George W. Bush, the U. S. President, yesterday afternoon signed off on the historic legislation -- the biggest government intervention in the financial markets since the Great Depression.

Its supporters are hoping the rescue effort will halt a deepening crisis in the U. S. financial system, which has seized up lending, kept stock markets on a roller-coaster ride and threatens to send the global economy into a tailspin.

Critics of the bailout, including many prominent economists, say it amounts to a rescue of companies and executives who created the problem and may end up doing nothing to help the struggling economy.

The bailout sparked contentious debate in the U. S. House of Representatives, where on Monday a majority of lawmakers voted down the legislation sending the Dow Jones industrial average spiralling down 777 points.

The House reversed course yesterday afternoon, voting 263 to 171 in favour of the bailout. The Senate overwhelmingly approved the bill on Wednesday after a series of popular tax provisions were added to it.

The bailout's passage comes just over two weeks after Henry Paulson, the U. S. Treasury Secretary, and Ben Bernanke, chairman of the U. S. Federal Reserve, stunned lawmakers by proposing the mammoth taxpayer-funded plan to buy hundreds of billions of dollars worth of toxic mortgage-related assets from struggling financial institutions.

Without it, they warned, the U. S. financial system could be headed for a complete meltdown.

Many lawmakers balked. Some noted that their constituents were outraged that the rich were getting a handout while a growing number of Americans are losing their jobs and struggling to hang on to their homes.

But passage of the legislation took on a new sense of urgency over the past week as two major U. S. retail banks -- Washington Mutual Inc. and Wachovia Corp. -- failed and stock markets around the globe tanked.

Lawmakers yesterday got another stunning example of the havoc the stress in the lending market is causing with the revelation that California might need an emergency loan of US$7-billion from the federal government within weeks to fund its day-to-day operations.

"This credit crisis has the power to grind the U. S. economy to a halt," Arnold Schwarzenegger, California's Governor, warned in a letter to Mr. Paulson on Thursday.

Some critics of the bailout believe Americans were unnecessarily spooked about how dire the situation is to get their support for the bailout.

"I thought it was quite interesting that the President of the United States was warning we were headed for another Great Depression," said Dean Baker, co-director of the Center for Economic and Policy Research. "That really scared a lot of people. People were running around taking their money out of their bank accounts."

But its supporters believe a massive bailout is needed to restore confidence in the U. S. financial system.

They argue that giving financial companies an opportunity to unclog their balance sheets of toxic mortgage-related assets will make them eager to lend again. That, in turn, should help the beleaguered housing market, which is at the centre of the crisis.

The legislation's passage did nothing to revive the stock market yesterday.

After trading about 200 points higher in anticipation of the vote, the Dow Jones industrial average soon gave up those gains and ended up sinking 157.47 points.

In Toronto, the S&P/TSX composite fell 97.19 points to close at 10,803.35.

Nevertheless, proponents of the bailout expect it eventually will calm investor jitters and help keep the economy from heading to a deep and painful recession.

Exactly how and at what price the toxic securities will be purchased remains unclear.

The U. S. Treasury may not end up actually buying illiquid mortgage-related assets until November, as staff for the program are hired and details of how it will work are determined over the next several weeks.

The fact the bailout has been approved should give an immediate boost to mortgage-backed securities "and that should provide some relief fairly quickly for severely stressed capital positions in the banking system," said Brian Bethune, chief U. S. financial economist with Global Insight.

That, coupled with a possible 50 basis point cut in U. S. interest rates by the Federal Reserve before the end of October, should provide the banking system with some much needed relief, he added.

Billionaire investor Warren Buffett said in an interview with CNBC that the bailout is "no panacea," but it will avert a "far worse" economic recession.

Once Wall Street is stabilized, Main Street should also see a better climate, such as access to lines of credit for small businesses to fund their operations.

"I'm keeping my fingers crossed and hoping it does something for me," said Neville Headley, owner of NAH Home Improvements in Orange, N. J. "But something should have been done a long time ago. If I'm having a problem with my company, I'm not going to call at the last minute and say, 'I've got to close the door.' "

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VIEW FROM THE STREET

Name David Marsh, 43 Occupation Software developer

Mr. Marsh spent three months this past Christmas consulting on some software improvements for Lehman Brothers Holdings Inc. in New York "When we started, they told us which hotels to stay in. They were very expensive. But the next month, they sent us to stay in New Jersey. The month after that, they told us to stay home completely. I thought they were nickel-and-diming us, but now I know why. They had run out of money."

Name Paul Raun, 49 Occupation Courier

"I was very strongly opposed to it. Just prolongs the crisis further.

This bailout prevents the different governments from dealing constructively with the problem." He says Congress should be spending the money on infrastructure. "It's just money down the drain," he said. As for the people he delivers to on Bay Street, he's definitely noticed more of an edge among the senior management.

Name Albert Page, 75 Occupation Lawyer "I'm not very happy about [what's going on in the U. S. economy]. Everybody standing here has money invested in the market. Especially people of a certain senior vintage who might soon plan on retiring are concerned. I'm not planning to retire, but my friends or people I run into are and they're thinking, 'There goes my retirement.' " As for U. S. banks, he says they should be responsible for their own greed. "There's a part of me [that] would've liked to see the banks go down. They deserve it. If you had guts and lots of money, you should be buying now."

Name Elvis Pervan, 38

Occupation: Account manager for Royal Bank of Canada Mr. Pervan is optimistic about the Canadian economy, but worries his co-workers aren't taking the U. S. meltdown seriously enough. "Surprisingly, not a lot of people are concerned. They have their daily lives, they work and have a job. They don't think they're affected. I think you should worry. As people start to see their friends losing their jobs, they'll worry." He's glad Canadian banks haven't needed the same bailouts. "I'd be very angry. Like [the Americans] I'd be very angry but doing nothing is far worse."

Name Lorenzo Baggio, 25 Occupation Unemployed student

A business student at the University of West-ern Ontario, Mr. Baggio is more worried about his own crushing student

debt than about the failure of U. S. banks. "I've got $22,000 from OSAP, and a $9,000 line of credit," he said. Mr. Baggio says he follows the U. S. situation by reading The Wall Street Journal daily, and waves a crumpled copy in his hands for effect. He's glad House Speaker Nancy Pelosi didn't torpedo the second vote, and thinks the bailout is a good, albeit temporary, solution.