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Washington — U.S. authorities are scrambling to craft Plan B.
The stunning defeat of a $700-billion (U.S.) bailout plan in Congress Monday sent financial markets into the worst panic since the 1987 Black Monday crash amid worries of worsening global credit contagion.
The blue-chip Dow Jones Industrial Average suffered its largest point-drop yet – down 777.68 points to 10,365.45, mirrored by precipitous stock plunges in Canada and elsewhere. Losses in the United States easily outstripped the cost of the bailout.
The scramble to safety also sent the price of gold and government bonds soaring.
A trader on the floor of the New York Stock Exchange looks up at the numbers on the board Sept. 29, 2008, as the Dow slid by a record 777.68 points after the House rejected a $700-billion (U.S.) financial bailout plan. (TIMOTHY A. CLARY/AFP/Getty Images)
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Investors had widely expected passage of the historic
bailout, whose centrepiece is a plan to use government funds to take toxic investments out of the hands of troubled U.S. financial institutions.
The bill's failure coincides with a growing freeze-up of the banking system around the world as financial institutions become increasingly fearful and cautious about lending to individuals, businesses and each other.
The House of Representatives voted 228-205 against the plan, including more than two-thirds of Republicans and four out of 10 Democrats.
Many of them blamed outraged constituents, who don't want their tax dollars to rescue Wall Street.
After the vote, President George W. Bush huddled at an emergency White House meeting with Treasury Secretary Henry Paulson, Federal Reserve Board chief Ben Bernanke and his top economic advisers. He vowed to work with congressional leaders to ease the credit crisis, but he offered no fresh ideas.
“I'm disappointed in the vote,” Mr. Bush said at the White House. “We've put forth a plan that was big because we've got a big problem.”
Mr. Paulson warned that the financial system is labouring under the strains of a wave of failures, blocking individuals and businesses from getting loans.
“This is much too important to simply let fail,” Mr. Paulson said outside the White House. “We need to get something done.”
The strain on the financial system was felt as far away as Asia, where stocks dropped sharply and the Japanese yen hit a four-month high Tuesday. Raw fear gripped markets, with oil prices diving by a 10th and gold prices rising for a third day, as investors faced hard realities that big economies could all be headed for a recession and the crisis of confidence in the bank industry could persist.
In the United States Monday, another major bank, Wachovia Corp. of Charlotte, N.C., succumbed under the weight of bad debt, agreeing to a takeover by Citibank.
Mr. Paulson pointed out that while the Treasury and the central bank have considerable tools to deal with the crisis, “they are not sufficient.”
One possibility is that the House could hold a new vote on the same package, or a slightly amended one, twisting the arms of members of Congress to change their minds. The Fed could also take on a much larger number of bad loans, without congressional approval, as part of its mandate to protect the banking system. Many Democrats want any relief to go to homeowners.
But the way forward looks murky. The Jewish New Year holiday of Rosh Hashanah means the House can't take another vote until Thursday at the earliest. Members of Congress had planned to suspend business this week and head out on the campaign trail for the Nov. 4 election. Reworking the bill could take days.
The bill's defeat seems to reflect the fact Americans don't agree on much these days. Polls show Democratic presidential candidate Barrack Obama and Republican John McCain locked in a tight race for the White House.
But many Americans are disgusted by the idea of spending taxpayers' money to bail out the same banks that triggered the worst financial crisis since the Great Depression. Many Republicans are ideologically opposed to doing anything.
Texas Republican Jeb Hensarling, one of the leaders of the revolt against the bailout, said he, like many Americans, doesn't want to pick up the tab for Wall Street's excesses.
“Once the government socializes losses, it will soon socialize profits,” Mr. Hensarling said. “If we lose our ability to fail, we will soon lose our ability to succeed. If we bail out risky behaviour, we will soon see even riskier behaviour.”
The narrow vote triggered a duel of recriminations on Capitol Hill, with Republicans and Democrats blaming each other for the bill's collapse.
Republican House Leader John Boehner said he could have delivered enough members to get the bill passed until his Democratic counterpart Nancy Pelosi “poisoned the environment” with a partisan floor speech, which attacked Mr. Bush's economic policies.
The Republicans estimated that as many as a dozen of their members changed their minds after hearing her remarks.
Incredulous, Barney Frank, the Democratic chairman of the House banking committee, suggested Republicans are the ones playing politics. “Because somebody hurt their feelings, they decided to punish the country,” he said.
Mr. McCain echoed that charge, blaming Mr. Obama and Democrats in Congress for “infusing this with too much partnership.”
For his part, Mr. Obama accused Mr. McCain of gambling with the country's economic future. “He likes to roll those dice,” he said while campaigning in Colorado. “We can't afford to gamble on four more years of the same disastrous economic policies we've had for the last eight.”
The White House has said Mr. Bush would make a statement on the financial bailout plan Tuesday at 8:45 a.m.
