Dow falls nearly 7 percent in wake of House bailout defeat

WASHINGTON — Congressional leaders and the Bush administration vowed Monday to try to revive a failed $700 billion rescue of Wall Street after 133 Republicans and 65 Democrats in the House of Representatives defied their leaders and killed the controversial plan, sending U.S. and global financial markets plunging in panic.

Treasury Secretary Henry Paulson and Federal Reserve Chairman Benjamin Bernanke warned that failure to pass the legislation would trigger a deep freeze in credit markets, which would shift Wall Street's problems to Main Street in ways large and small.

"I am very disappointed in today's vote," said a visibly angry Paulson, standing outside the White House. "There's been significant turmoil in financial markets in the past few days . . . . Markets around the world are under stress. . . . Families, too, feel the credit crunch as it becomes more difficult to get car loans or student loans.

"I am committed to continue to work with my fellow regulators to use all of the tools available to protect our financial system and our economy. Our tool kit is substantial but insufficient."

He vowed to keep working with Congress in search of a solution. "We've got much work to do and this is much too important to simply let fail . . . . We need to get something done . . . as soon as possible," Paulson said.

After almost two weeks of feverish efforts to draft a compromise bailout that all sides could live with, the House rejected the rescue plan by 228 to 205. Republicans defied their president, their presidential nominee and their party leaders, as 133 rejected the plan and only 65 voted in its favor. Democrats voted 140-65 for the plan.

Looming defeat of the plan sent stocks plunging even before the vote was final. The Dow Jones Industrial Average closed down 778.68 points, or 7 percent, the largest one-day point drop ever, but well below the Dow's 22 percent drop on Oct. 19, 1987.

Similarly, the S&P 500 sunk 106.85 points to 1106.42, down 8.8 percent. The tech-heavy Nasdaq took the biggest hit, falling 199.61 points to close at 1983.73, down 9.1 percent.

Investors fled any asset viewed as risky; in after-hours trading, contracts for next-month delivery of oil skidded down $11.45 to $95.44 a barrel. Gold, a safe haven in times of investor fear, was up $23 to $911 an ounce.

All told, markets lost more than $1 trillion in value, analysts said. As stocks skidded, so did the value of 401(k) retirement plans and individual retirement accounts held by ordinary Americans.

Leaders in Washington vowed to go back to the drawing board.

"We put forth a plan that was big because we have a big problem," said a somber President Bush during a White House photo op with Ukrainian President Viktor Yuschenko. "Our strategy is to continue to address this economic situation head on and we will be working to develop a strategy that will enable us to move forward."

House Speaker Nancy Pelosi, D-Calif., sounded a similar note: "The legislation has failed. The crisis has not gone away. We must work together in a bipartisan way to have another bite at the apple."

House Republican leaders also pledged to seek a new bipartisan remedy that could pass, but they salted their remarks with partisan shots at Pelosi for making what they said was a partisan speech on the House floor shortly before the vote that inflamed Republican lawmakers and persuaded as many as 12 of them to reverse their reluctant decisions to vote for the plan.

"We could've gotten there today (except for) this partisan speech that the speaker gave on the floor of the House," said House Republican Leader John Boehner of Ohio. "We've got to put partisanship aside."

Lawmakers won't vote again on any rescue plan before Thursday, since many are returning to their districts for Rosh Hashanah, which marks the start of the Jewish New Year.

The House's failure to pass the Wall Street rescue bill was a bitter defeat for Bush and his party's nominee to replace him, John McCain, who'd suspended his campaign late last week to push for passage of the plan. McCain's camp on Sunday had bragged that he was instrumental in winning over recalcitrant Republicans.

In a brief appearance before the media at about 5 p.m. EDT Monday, McCain blamed Democratic presidential nominee Barack Obama and Democratic lawmakers for the plan's defeat.

"Senator Obama and his allies on Congress infused unnecessary partisanship in the process," McCain said. Earlier, a statement from McCain's campaign had singled out Pelosi for blame, echoing the House GOP leaders.

In an angry response, Rep. Barney Frank, D-Mass., the chairman of the House Financial Services Committee who helped craft the compromise, said that means GOP lawmakers ignored warnings from Paulson and Bush that financial ruin could follow if the plan didn't pass, and they rejected the plan "because somebody hurt their feelings . . . .

"I think they are covering up the embarrassment of not having the votes," Frank said.

Obama said "there's a lot of blame to spread around" and appealed for "the American people and the markets to stay calm" while leaders continue trying to craft a bailout package that can be enacted.

"Step up to the plate. Get it done," he had said earlier in Wisconsin.

In a sign that America's financial crisis has spread far and wide, the governments of Belgium, Holland and Luxembourg on Monday nationalized some banks or insurance companies in moves that parallel recent actions by the U.S. Treasury Department and Federal Reserve. On Tuesday morning in Asia, the Tokyo and Hong Kong stock markets opened down sharply.

Before U.S. markets opened Monday, the Federal Deposit Insurance Corp., a federal bank regulator, announced that it had brokered the purchase by Citigroup of the banking operations of Charlotte, N.C.-based national bank Wachovia for just over $2.2 billion, or about $1 a share.

In anticipation of a volatile day, the Federal Reserve early Monday announced that it was tripling one of its emergency lending operations to $75 billion, raising to $300 billion the amount it has available in 84-day lending to struggling financial institutions.

Underscoring the global nature of the financial market that's now in turmoil, the Fed also boosted complicated reciprocal swap agreements with the central banks of Canada, England, Japan, Denmark, Norway, Australia, Sweden, Switzerland and the European Union.

With so much financial turmoil worldwide, why did House Republicans revolt

against the compromise plan their leaders asked them to support?

"Too many people had too many problems with it," said Rep. Sue Myrick, R-N.C. "They were very uncomfortable."

"If there was a button that said 'Hell, no,' I'd push it," added Rep. Gene Taylor, R-Texas.

The simplest explanation is that the entire 435-member House is up for re-election on Nov. 4, and members were flooded with calls and e-mails opposing what was viewed on Main Street as a bailout of Wall Street.

"The thing was couched in the terms that it was a bailout of Wall Street fat cats. And I can assure you that there's no enthusiasm for bailing out Wall Street fat cats," said Rep. Ben Chandler, D-Ky, who voted no.

(David Lightman, David Montgomery, Les Blumenthal, Lesley Clark, Halimah Abdullah, Lisa Zagaroli and Erika Bolstad contributed from Washington. William Douglas contributed from Ohio and Colorado. Margaret Talev contributed from Wisconsin and Colorado.)

More from McClatchy:

Those who remember the Depression fear its return

One Republican explains why he switched his 'no' vote

Rescue package aside, economy faces deep challenges

Is the bailout needed? Many economists say 'no'

On the Web: The Economy in Turmoil

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