Stocks Plunge as Bailout Fails

Monday, 29 September 2008 15:29 By Carl Hulse and David M Herszenhorn, The New York Times | name.

Stocks Plunge as Bailout Fails
House fails to pass bailout plan. (Photo: Matthew Cavanaugh / European Pressphoto Agency)

    Dow loses 777 points after vote.

    Washington - In a moment of historic import in the Capitol and on Wall Street, the House of Representatives voted on Monday to reject a $700 billion rescue of the financial industry. The vote came in stunning defiance of President Bush and Congressional leaders of both parties, who said the bailout was needed to prevent a widespread financial collapse.

    The vote against the measure was 228 to 205, with 133 Republicans joining 95 Democrats in opposition. The bill was backed by 140 Democrats and 65 Republicans.

    Supporters vowed to try to bring the rescue package up for consideration again as soon as possible, perhaps late Wednesday or Thursday, but there were no definite plans to do so.

    Stock markets plunged as it appeared that the measure would go down to defeat, and kept slumping into the afternoon when that appearance became a reality. By late afternoon the Dow industrials had fallen more than 5 percent, and other indexes even more sharply. Oil prices fell steeply on fears of a global recession; investors bid up prices of Treasury securities and gold in a flight to safety. House leaders pushing for the package kept the voting period open for some 40 minutes past the allotted time, trying to convert "no" votes by pointing to damage being done to the markets, but to no avail.

    The vote was a catastrophic political defeat for President Bush, who was described as "very disappointed" by a spokesman, Tony Fratto. Mr. Bush had put the full weight of the White House behind the measure and had lobbied wavering Republicans in intensely personal telephone calls on Monday morning before the vote. Both presidential candidates also supported the plan.

    Supporters of the bill had argued that it was necessary to avoid a collapse of the economic system, a calamity that would drag down not just Wall Street investment houses but possibly the savings and portfolios of millions of Americans. Moreover, supporters argued, a lingering crisis in America could choke off business and consumer loans to a degree that could prompt bank failures in Europe and slow down the global economy.

    Opponents said the bill was cobbled together in too much haste and might amount to throwing good money from taxpayers after bad investments from Wall Street gamblers.

    Immediately after the vote, many House members appeared stunned. Some Republicans blamed Speaker Nancy Pelosi, Democrat of California, for a speech before the vote that disdained President Bush's economic policies, and did so, in the opinion of the speaker's critics, in too partisan a way.

    "Clearly, there was something lacking in the leadership here," said Representative Eric Cantor, Republican of Virginia.

    Democrats, meanwhile, blamed the Republicans for not coming up with enough support for the measure on their side of the aisle.

    Members of both parties, doing a quick political post-mortem, said those who voted no had encountered too much hostility for the bill among their constituents, and were worried that a vote in favor would be political suicide.

    The Senate had been expected to vote later in the week if the bill had cleared the House on Monday. Senate vote-counters had predicted that there was enough support in the chamber for the measure to pass. But the stunning vote in the House, coupled with the Jewish holidays, made it difficult to predict when other votes might be held. Many House members who voted for the bill held their noses, figuratively speaking, as they did so.

    Representative John A. Boehner of Ohio, the Republican minority leader, called the measure "a mud sandwich" at one point, but he said that there was too much at stake not to support it. He urged members to reflect on the damage that a defeat of the measure could mean "to your friends, your neighbors, your constituents" as they might watch their retirement savings "shrivel up to zero."

    And Representative Steny Hoyer of Maryland, who as Democratic majority leader often clashes with Mr. Boehner, said that on this "day of consequence for America" he and Mr. Boehner "speak with one voice" in pleading for passage.

    When it comes to America's economy, Mr. Hoyer said, "none of us is an island."

    The House debate was heated and, occasionally, emotional up to the last minute, as illustrated by the remarks of two California lawmakers.

    Representative Darrell Issa, a Republican, said he was "resolute" in his opposition to the measure because it would betray party principles and amount to "a coffin on top of Ronald Reagan's coffin."

    But Representative Maxine Waters, a Democrat, said the measure was vital to help financial institutions survive and keep people in their homes. "There's plenty of blame to go around," she said, and attaching blame should come later.

    The House vote came after a weekend of tense negotiations produced a rescue plan that Congressional leaders said was greatly strengthened by new taxpayer safeguards. "If we defeat this bill today, it will be a very bad day for the financial sector of the economy," said Representative Barney Frank, Democrat of Massachusetts and the chairman of the Financial Services Committee. Earlier Monday, President Bush urged Congress to act quickly. Calling the rescue bill "bold," Mr. Bush praised lawmakers "from both sides of the aisle" for reaching agreement, and said it would "help keep the crisis in our financial system from spreading throughout our economy."

    After long favoring a hands-off approach and deregulation of the financial industry, the Bush administration has found itself in recent weeks interceding repeatedly in the private market to try to avert one calamity after another.

    Even before the House vote, European and Asian stock markets declined sharply on Monday, especially in countries where major banks have had significant problems with mortgage investments, like Britain and Ireland. In the credit markets, investors once again bid up prices of Treasury securities and shunned more risky debt.

    Early in the House debate, Jeb Hensarling, Republican of Texas, said he intended to vote against the package, which he said would put the nation on "the slippery slope to socialism." He said that he was afraid that it ultimately would not work, leaving the taxpayers responsible for "the mother of all debt."

    Another Texas Republican, John Culberson, spoke scathingly about the unbridled power he said the bill would hand over to the Treasury secretary, Henry M. Paulson Jr., whom he called "King Henry."

    A third Texan, Lloyd Doggett, a Democrat, said the negotiators had "never seriously considered any alternative" to the administration's plan, and had only barely modified what they were given. He criticized the plan for handing over sweeping new powers to an administration that he said was to blame for allowing the crisis to develop in the first place.

    The administration accepted limits on executive pay and tougher oversight; Democrats sacrificed a push to allow bankruptcy judges to rewrite mortgages. But Republicans fell short in their effort to require that the federal government insure, rather than buy, the bad debt.

    The final version of the bill included a deal-sealing plan for eventually recouping losses; if the Treasury program to purchase and resell troubled mortgage-backed securities has lost money after five years, the president must submit a plan to Congress to recover those losses from the financial industry.

    Presumably that plan would involve new fees or taxes, perhaps on securities transactions.

    The deal would also restrict gold-plated farewells for executives of companies that sell devalued assets to the Treasury Department. But by mid-afternoon on Monday, no one could safely predict whether the provisions in the 110-page bill were strictly academic.

    "The legislation has failed," Speaker Pelosi said at a news conference after the vote. "The crisis has not gone away. We must continue to work in a bipartisan manner."


    Reporting was contributed by David Stout and Robert Pear from Washington, Keith Bradsher from Hong Kong and Graham Bowley from New York.

Last modified on Friday, 12 December 2008 20:48