Image: Barney Frank
Rep. Barney Frank, D-Mass., chairman of the Financial Services Committee and a leading negotiator in crafting the compromise bill, blamed breakaway Republicans for killing the plan.
By M. Alex Johnson Reporter
msnbc.com
updated 9/29/2008 8:33:39 PM ET 2008-09-30T00:33:39

World financial markets reeled as stunned lawmakers groped for their next move Monday after House Republicans abandoned President Bush in droves to help kill his $700 billion proposal to rescue the financial services industry.

Even before the vote was announced, stocks began tanking on Wall Street. The Dow Jones Industrial Average nose-dived by more than 777 points, its worst fall ever , in a sell-off that swept markets around the globe .

As fears rose that the credit crisis was spreading, Asian and European markets closed sharply down, and governments in at least eight European countries took steps to begin rescuing large banking institutions.

Democrats and Republicans argued bitterly over who was at fault for the 228-205 vote that torpedoed a compromise bailout plan that would have allowed the Treasury Department to buy up toxic assets from struggling banks.

Lawmakers shouted news of the plummeting Dow as they crowded on the House floor during the roll call, which dragged on for roughly 40 minutes as leaders on both sides scrambled to corral enough of their rank-and-file members to support the deeply unpopular measure.

Ample “no” votes came from both sides of the aisle, but Democratic leaders managed to persuade more than 60 percent of their members to back the measure, while more than two-thirds of Republicans balked at spending so much taxpayer money just before the Nov. 4 elections.

The House canceled plans for a pre-election recess and was scheduled to reconvene Thursday , although no plan of action had yet been worked out.

Bush vows to keep working

The defeat of the measure was a severe loss for Bush, who personally led lobbying efforts to bring Republican lawmakers on board.

The president told reporters at the White House that he was disappointed by the vote and promised that “we’ll be working with leaders of Congress on the way forward.”

Administration officials were described as “shellshocked” by the defeat. They planned meetings Monday night to plan their next step, but officials told NBC News that there seemed to be no clear path forward.

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Treasury Secretary Henry Paulson, saying the statutory tools at his disposal were “substantial but insufficient,” likewise vowed to “work with congressional leaders to find a way forward to pass a comprehensive plan to stabilize the financial system and protect the American people.”

“We’ve got much work to do, and this is much too important to simply let fail,” he said.

But the overriding question for was what to do next as Congress tries to adjourn so members can go home and campaign for re-election.

“We’re certainly not going to abandon our responsibility,” said House Majority Leader Steny Hoyer, D-Md. “We’ll continue to focus on this and see what actions we can take.”

Rep. Barney Frank, D-Mass., chairman of the Financial Services Committee and a leading negotiator in crafting the compromise bill, blamed breakaway Republicans for killing the plan.

Frank noted comments by some Republicans who said a floor speech shortly before the vote by House Speaker Nancy Pelosi, D-Calif., was needlessly partisan and said he had not “computed that level of pettiness” across the aisle.

“Sixty-seven percent of Republicans decided to put political ideology ahead of this nation,” he said. “The numbers of deeply offended Republicans turned out to be the number you would need to defeat the vote.”

Republicans defend 'no' votes
But Republicans who voted against the bill objected, saying the measure did not do enough to protect individual investors and bank account holders.

“New York city fat-cats expect Joe Sixpack to suck it up and foot the bill for their excesses. I think not,” said Rep. Ted Poe, R-Texas.

Rep. Jack Kingston, R-Ga., said he had three insurmountable problems with the bill: It was too expensive, it rewarded Wall Street firms by guaranteeing private profits with public funds and it did not address an antiquated regulatory system.

“This throws a life jacket to Wall Street, but it doesn’t teach them to swim and prevent this from happening again,” Kingston said.

Rep. Cathy McMorris Rodgers, R-Wash., called her decision to vote no “one of the most difficult I have faced.”

“I agree this bill is much better than the one we started with,” McMorris Rodgers said. But “committing 700 billion of our tax dollars requires a longer, more thoughtful debate.”

Overseas markets plunge
Reaction was just as swift from foreign markets. Brazil’s Ibovespa stock index dived by 13.8 percent in afternoon trading, Argentina’s Merval index dropped 8.8 percent, Mexico’s Bolsa index slipped 6.2 percent and Chile’s Ipsa index fell 4.6 percent.

The slide was already well under way in Europe and Asia as nervous traders bet against a U.S. bailout. Japan’s Nikkei 225 Index fell 149.55 points and Hong Kong’s blue-chip Hang Seng Index fell 801.41 points, to close at 17,880.70. European shares suffered their biggest losses in eight months, with London’s FTSE down 5.3 percent, Germany’s DAX by 4.2 percent and France’s CAC by 5 percent.

Frank Geilfuss, head analyst at Bankhaus Loebbecke, said investors were “fearful, frenetic, especially when it comes to banking shares. They want to get out now and see the after effects from afar.”

The swings began after Wachovia Corp. agreed to sell most of its assets to Citigroup Inc. in a deal brokered by regulators. Monday, governments in eight European capitals took similar action, signaling that “the contagion is spreading to mainland Europe” said Mark Sartori, head of European sales trading at Fox-Pitt, Kelton in London.

French President Nicolas Sarkozy called for coordinated action by the European Union to step into the vacuum after the British government mortgage lending giant Bradford & Bingley Plc and Belgium, the Netherlands and Luxembourg partly nationalized Belgian-Dutch group Fortis NV.

Germany, meanwhile, led a consortium of banks to rescue mortgage lender Hypo Real Estate Holding AG secured a credit line from the German government, and bank rescue deals also emerged in Iceland, Russia and Denmark.

‘Can’t see what the upside is’
The legislation would have allowed the government to buy bad mortgages and other rotten assets held by troubled banks and financial institutions. Getting those debts off their books would bolster those companies’ balance sheets, making them more inclined to lend and easing one of the biggest chokepoints in the credit crisis. If the plan worked, the thinking went, it would help lift a major weight off the sputtering national economy.

“I can’t believe they weren’t able to come together and come up with a solution,” said Stephen Berte, a senior equity trader at Standard Life in Boston. “I can’t see what the upside is right now.”

Sen. Barack Obama of Illinois, the Democratic nominee for president, said the “inaction in Congress” illustrated why “the American people are disgusted with Washington.”

“Now is the time for Democrats and Republicans to join together and act in a way that prevents an economic catastrophe,” Obama said in a statement.

The campaign of the Republican nominee, Sen. John McCain of Arizona, used the occasion as an opportunity to blame Obama for the failure of the measure.

“Barack Obama failed to lead, phoned it in, attacked John McCain, and refused to even say if he supported the final bill,” McCain’s senior policy adviser, Doug Holtz-Eakin, said in a statement. “This bill failed because Barack Obama and the Democrats put politics ahead of country.”

McCain ignored reporters’ shouted questions Monday as he boarded his plane for a campaign stop in Des Moines, Iowa.

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