CRISIS DEEPENS

Washington, Sept. 27 (Reuters): The US Congress and the Bush administration were under intense pressure on Saturday to negotiate a $700-billion rescue for the financial industry to free up frozen credit before world markets reopen after the weekend.

US House of Representatives speaker Nancy Pelosi and President George W. Bush both have expressed optimism that a deal could be reached soon to stave off the worst US financial crisis since the Great Depression.

Talks on Thursday had collapsed in acrimony. A second day of intense negotiations on Friday between rancorous Democrats and Republicans failed to produce accord on how to structure a deal allowing the government to buy up soured assets that are choking credit.

There were fears that US stocks, which ended up mostly higher on Friday as bank shares rallied on optimism for a deal, would take a dive if there is no accord before markets reopen, with reverberations in the world economy.

“I believe that progress has been made,” said Pelosi, a California Democrat.“We will not leave until legislation is passed. We will be working through the weekend to achieve that end,” Pelosi said.

Early in the week, there had been hopes for a speedy approval of the plan by Congress, crafted by Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke and presented to Congress last weekend.

But conservative Republicans balked. With an eye to bring them on board, Democrats have now offered to add a mortgage insurance measure. Republicans had wanted the government to offer coverage for roughly half of all mortgage-backed securities that it does not already insure.

Although Democrats control Congress, they are hesitant to pass a bailout bill without rank-and-file Republican support because it could leave their party politically exposed just weeks before the presidential and congressional elections.

Wachovia merger

Wachovia Corp has begun preliminary merger talks with Citigroup Inc, the New York Times said on Friday, a move that would combine two giant US banks battered by the global credit crisis.

The talks are early and no transaction may emerge, the newspaper said, citing people briefed on the matter.

Wachovia’s market value was about $21.6 billion as of Friday’s market close, and Citigroup’s was $109.7 billion.

Wachovia spokesperson Christy Phillips-Brown declined to comment. Citigroup did not return calls.

Charlotte, North Carolina-based Wachovia, the sixth-largest US bank by assets, has faced persistent pressure from investors because of its $122 billion of option adjustable-rate mortgages, a portfolio that chief executive Robert Steel considers “distressed.”

The bank suffered a record $9.11 billion loss in the second quarter, and some analysts have said it may need more capital after raising $8.05 billion in April.

WaMu bankruptcy

The US financial crisis deepened further with Washington Mutual (WaMu) deciding to file for bankruptcy protection after selling its banking operations to JPMorgan Chase.

WaMu, according to reports, was expected to lose around $19 billion on bad mortgages.

Credit agency Standard and Poor’s has also slashed its rating to eight level below investment grade.

Earlier the US administration has seized WaMu and sold its banking operation to JPMorgan Chase for USD 1.9 billion.