WASHINGTON – The historic effort to rescue the U.S. financial system was thrown into doubt Monday after the House rejected a $700 billion emergency plan, sending stocks to their deepest one-day point loss ever. Stunned leaders of both parties and the White House scrambled to put together a new effort to bolster confidence in the U.S. financial system after the legislation that was widely expected to pass the House fell victim to partisan acrimony.
Officials and lawmakers said they hope ailing financial institutions and frightened markets could hold on until Thursday, when the House again might take up the legislation after a two-day break for observance of Jewish holidays.
Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben 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.”
The rescue plan would have permitted the Treasury Department to buy or insure up to $700 billion in mortgage-related assets in an effort to jump-start credit markets. In recent days, banks have stopped providing loans to each other and officials warned that credit for small businesses and households would become unavailable.
Congressional leaders and the White House faced several options, none of them palatable just weeks before a heavily contested presidential election.
Democratic leaders could choose to return with a measure guaranteed to win more Democratic votes, even at the expense of Republican support. Instead of simply purchasing distressed assets from financial institutions, some Democratic economists favor injecting lenders with cash in exchange for stock, letting the institutions figure out what to do with the mortgage-backed securities and other troubled assets weighing down their books.
A Democratic bill would also include more money for homeowners in or facing foreclosure and would change the bankruptcy law to allow judges to adjust mortgage repayment terms. But Democratic leaders would have to ensure that the measure could survive a filibuster in the Senate and would be signed by the president.
Republicans were advocating slight changes to the bill that could attract a handful of new votes. Party members might be enticed by a measure that would allow businesses to write off more past losses on this year’s taxes or a more robust expansion of mortgage insurance, financed by banks. Democrats could add more assistance to ailing state and local governments without raising too many GOP objections.
Monday’s vote was seen as a defeat for an outgoing administration with waning powers of persuasion and as a product of a congressional culture so soured by years of rancor that it has become dysfunctional even at moments of national crisis. Public opposition to a bailout was the reason most frequently cited by Republicans and Democrats who voted “no.”
The leaders of both parties had endorsed the bill, warning that Wall Street’s woes were about to affect the pocketbooks of ordinary Americans.
“The legislation has failed. The crisis has not gone away,” said House Speaker Nancy Pelosi, D-Calif.
The drama was palpable in the House chamber when, as “no” votes were outpacing “aye” votes, a Democratic leader began to circle the chamber repeating: “The market is falling. The market is falling.” On the floor of the New York Stock Exchange, meanwhile, traders fell silent as they watched television screens showing the House vote falter.
In the end, the rescue plan failed by a vote of 228-205. By party, 140 Democrats voted yes, and 95 voted no; 133 Republicans opposed it, while 65 approved.
“The Democratic side more than lived up to its side of the bargain,” said Pelosi.
The Dow Jones industrial average plummeted 777.68 points to close at 10365.45 – not only a record point drop but also the stock index’s lowest level since 2005. Markets in Canada, Mexico and Brazil also stumbled.
The historic carnage on Wall Street reverberated across Asia today. All major Asian stock markets in the region tumbled across the board, succumbing to heightened fears of a broader global financial crisis.
Japan’s benchmark Nikkei 225 index nose-dived more than 544 points, or 4.6 percent, to 11,199.07, with popular stocks like Sony Corp. down 6.8 percent and Toyota Motor Corp. down 4.6 percent.
“The markets answered the question today for everyone – in case anyone had any doubts – about whether no action was acceptable,” said Senate Minority Leader Mitch McConnell, R-Ky. “No action is not an answer.”
Chastened, leaders of both sides pledged to keep working to pass the bill. Senate leaders said they hoped to vote by the end of the week.
“The bottom line is this: If we don’t act promptly around here, and effectively, then a lot of people are going to lose their jobs,” said Sen. Judd Gregg, R-N.H., the top Republican on the Senate Budget Committee and a lead negotiator of the legislation.
Some strategists suggested that Democratic leaders try to pass the bill solely with Democratic support. But Pelosi and other Democrats have said that the plan is not theirs but the Bush administration’s, and that both parties should share in the outcome’s blame or credit.
Paulson said the government would continue to act to try to contain the crisis using its existing powers. The Federal Reserve took one such step Monday, announcing it would more than double the cash available to banks with shaky assets by adding hundreds of billions of dollars to existing loan programs.
In what has become a familiar routine, Democratic and Republican leaders blamed each other for the failure. Ultimately, 60 percent of the chamber’s Democrats supported the bill, but only 33 percent of Republicans did.
Republican leaders said they lost 12 votes at the last minute.
“I do believe that we could have gotten there today had it not been for this partisan speech that the speaker gave on the floor of the House,” said Minority Leader Rep. John Boehner, R-Ohio. “We put everything we had into getting the votes to get there today.”
Rep. Joe Barton, R-Texas, said Bush called him early in the day to ask him to vote for the measure. But Barton said he decided to oppose it because of other phone calls, hundreds of them, from constituents who expressed opposition.
“This was no easy vote,” and the compromise bill “wasn’t all bad,” Barton said. “But in its final version, it failed to give taxpayers the protection they deserve.”
Bush did his best to promote the plan, starting the day with a televised statement designed to calm the markets and rally votes.
“With this strong and decisive legislation, we will help restart the flow of credit, so American families can meet their daily needs and American businesses can make purchases, ship goods and meet their payrolls,” the president said.
But his words appeared to have little effect either on the markets or on lawmakers.
“It was a revolution by the troops,” said Michael A. Genovese, director of the Institute for Leadership Studies at Loyola Marymount University in Los Angeles. “The generals were saying, ‘Follow me,’ and they didn’t.”