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Dow dives as bailout bill fails in Congress

Posted September 29, 2008

— The failure of the bailout package in Congress literally dropped jaws on Wall Street and triggered a historic selloff – including a terrifying decline of nearly 500 points in mere minutes as the vote took place, the closest thing to panic the stock market has seen in years.

The Dow Jones industrial average lost 777 points Monday, its biggest single-day fall ever, easily beating the 684 points it lost on the first day of trading after the Sept. 11, 2001, terrorist attacks.

As uncertainty gripped investors, the credit markets, which provide the day-to-day lending that powers business in the United States, froze up even further.

At the New York Stock Exchange, traders watched with faces tense and mouths agape as TV screens showed the House vote rejecting the Bush administration's $700 billion plan to buy up bad debt and shore up the financial industry.

Activity on the trading floor became frenetic as the "sell" orders blew in. The selling was so intense that just 162 stocks on the Big Board rose, while 3,073 dropped.

The Dow Jones Wilshire 5000 Composite Index recorded a paper loss of $1 trillion across the market for the day, a first.

The Dow industrials, which were down 210 points at 1:30 p.m. EDT, nose-dived as traders on Wall Street and investors across the country saw "no" votes piling up on live TV feeds of the House vote.

By 1:42 p.m., the decline was 292 points. Then the bottom fell out. Within five minutes, the index was down about 700 points as it became clear the bill was doomed.

"How could this have happened? Is there such a disconnect on Capitol Hill? This becomes a problem because Wall Street is very uncomfortable with uncertainty," said Gordon Charlop, managing director with Rosenblatt Securities.

"The bailout not going through sends a signal that Congress isn't willing to do their part," he added.

While investors didn't believe that the plan was a cure-all and it could take months for its effects to be felt, most market watchers believed it was at least a start toward setting the economy right and unlocking credit.

"Clearly something needs to be done, and the market dropping 400 points in 10 minutes is telling you that," said Chris Johnson, president of Johnson Research Group. "This isn't a market for the timid."

Before trading even began came word that Wachovia Corp., one of the biggest banks to struggle from rising mortgage losses, was being rescued in a buyout by Citigroup Inc.

That followed the recent forced sale of Merrill Lynch & Co. and the failure of three other huge banking companies - Bear Stearns Cos., Washington Mutual Inc. and Lehman Brothers Holdings Inc., all of them felled by bad mortgage investments.

And it raised the question: Which banks are next, and how many? The Federal Deposit Insurance Corp. lists more than 110 banks in trouble in the second quarter, and the number has probably grown since.

Wall Street is contending with all of it against the backdrop of a credit market - where bonds and loans are bought and sold - that is barely functioning because of fears that anyone lending money will never be paid back.

More evidence could be found Monday in the Treasury's three-month bill, where investors were stashing money, willing to accept the tiniest of returns simply to be sure that their principal would survive. The yield on the three-month bill was 0.15 percent, down from 0.87 percent and approaching zero, a level reached last week when fear was also running high.

Analysts said the government needs to find a way to help restore confidence in the markets.

"It's probably fair to say that we are not going to see any significant stability in the credit markets or the stock market until we see some sort of rescue package passed," said Fred Dickson, director of retail research for D.A. Davidson & Co.

The bailout bill failed 228-205 in the House, and Democratic leaders said the House would reconvene Thursday in hopes of a quick vote on a revised bill.

"We need to put something back together that works," Treasury Secretary Henry Paulson said. "We need it as soon as possible."

The Dow fell 777.68 points, just shy of 7 percent, to 10,365.45, its lowest close in nearly three years. The decline also surpasses the record for the biggest decline during a trading day - 721.56 at one point on Sept. 17, 2001, when the market reopened after 9/11.

In percentage terms, it was only the 17th-biggest decline for the Dow, far less severe than the 20-plus-percent drops seen on Black Monday in 1987 and before the Great Depression.

Broader stock indicators also plummeted. The Standard & Poor's 500 index declined 106.62, or nearly 9 percent, to 1,106.39. It was the S&P's largest-ever point drop and its biggest percentage loss since the week after the October 1987 crash.

The Nasdaq composite index fell 199.61, more than 9 percent, to 1,983.73, its third-worst percentage decline. The Russell 2000 index of smaller companies fell 47.07, or 6.7 percent, to 657.72.

A huge drop in oil prices was another sign of the economic chaos that investors fear. Light, sweet crude fell $10.52 to settle at $96.36 on the New York Mercantile Exchange as investors feared energy demand would continue to slide amid further economic weakness. And gold, where investors flock when they need a relatively secure investment, rose $23.20 to $911.70 on the Nymex.

Marc Pado, U.S. market strategist at Cantor Fitzgerald, said investors are worried about the spread of troubles beyond banks in the U.S. to Europe and other markets.

"Things are dying and breaking apart," he said.

The federal Office of Thrift Supervision, one of the government's banking regulators, indicated that the market was overreacting to the House vote and that its fears about the financial system are misplaced.

"There is an irrational financial panic taking place today, and we support and applaud the continuing efforts of Secretary Paulson and congressional leadership to restore liquidity and public confidence," John Reich, Director of the federal Office of Thrift Supervision, said in a statement.

The plan would have placed caps on pay packages of top executives that accepted help from the government, and included assurances the government would ultimately be reimbursed by the companies for any losses.

The Treasury would have been permitted to spend $250 billion to buy banks' risky assets, giving them a much-needed cash infusion. There also would be another $100 billion for use at the president's discretion and a final $350 billion if Congress signs off.

But Wall Street found further reason for worry overseas. Three European governments agreed to a $16.4 billion bailout for Fortis NV, Belgium's largest retail bank, and the British government said it was nationalizing mortgage lender Bradford & Bingley, which has a $91 billion mortgage and loan portfolio. It was the latest sign that the credit crisis has spread beyond the U.S.

---

Business Writers Joe Bel Bruno in New York and Christopher S. Rugaber in Washington contributed to this report.

185 Comments

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  • Scrofula Sep 30, 2008

    "But again, this is a red herring (at best) compared to CRA. Gotta love politicos, when they realize they can't win an argument, they attempt to change the subject."

    Really. Perhaps you'll explain then, in detail, why you feel that CRA caused the current situation.

    It has nothing to do with winning an argument. It has to do with facts and accuracy. The situation is either correctly presented, or it isn't.

    "I hope you weren't an Econ major at ECTC..."

    No, I'm working on a Masters in Accounting at ECU. You assume that I went here for undergrad as well, which is erroneous.

    Undergrad would be dual degrees in Accounting and Finance at Duke. I'm at ECU because they gave me the best waiver/stipend package.

    (i.e. don't make assumptions)

  • Scrofula Sep 30, 2008

    "So the facts as you present them, are that your own party voted 3-1 for this during a Clinton presidency...yet you somehow blame the other party...those are the FACTS."

    Nobody ever said that Dems unilaterally opposed the bill. That said, you left out the Senate vote entirely.

    The point that was made was that this bill was proposed by Republicans, sponsored by Republicans and enjoyed the vast majority of its support from Republicans. The most damaging amendments made to the bill also came from Republicans, one in particular from the same individual that so loudly voiced his intent in 2003 to fix the mess (Shelby of AL).

  • chivegas Sep 29, 2008

    "House vote: 210 Republican Ayes, 5 Republican Nays, 10 Republican no vote ... 151 Democrat Ayes, 50 Democrat Nays, 4 Democrat no votes."

    So the facts as you present them, are that your own party voted 3-1 for this during a Clinton presidency...yet you somehow blame the other party...those are the FACTS.

    But again, this is a red herring (at best) compared to CRA. Gotta love politicos, when they realize they can't win an argument, they attempt to change the subject.

    I hope you weren't an Econ major at ECTC...

  • Scrofula Sep 29, 2008

    "This whole mess started in 1977 (under Carter), revived in 1999 (under Clinton) where it really took a life of its own, and was revised under Bush. Look up COMMUNITY REVITALIZATION ACT. By giving credit those who can't afford it, we have been put into this mess, all for the sake of trading the American dream of home ownership to an "American Entitlement". Once these bad loans were in place the government turned its back on SEC and Banking rules to let the lenders and investment companies do as they wish."

    Please see previous commentary about why it's specious to blame CRA for the current mess.

  • motoxmomb Sep 29, 2008

    NavyVet--Smartest Comment tonight so far.

  • jointheir Sep 29, 2008

    If I may summarize it in one word - YEAH!!!!
    How about congress and them who have a high priced condo in Washington as well as at home cut their salary to help out? Why do we the people have to bail them out.. If all congress took a $5K pay cut and turn in their 2008 Mercedes lease We can make a serious dent in not only the crisis but also the deficit.
    THIS IS SO AWESOME to see and hear that the people have spoken and they listened! FINALLY. WE need to keep this up.. Dont alow Palisi to get it or even Bush.

  • chivegas Sep 29, 2008

    "COMMUNITY REVITALIZATION ACT" actually its the "Community Reinvestment Act". But you're on the right track. Both parties have totally screwed us over in the last 20 years. I'm tired of the crat's blaming the 'pubs. They share the larger piece of blame for the housing market.

    I still haven't decided how I feel about the bailout. I do like to see capitalism work on both the macro and micro scale, but I want our economy to stay strong. Personally, I agree no one from these inept banks should profit 1 penny. However, what most Americans either ignore or forget is that these banks have to pay the money back.

  • lizard Sep 29, 2008

    I ask again,,,when will these stupid advertisements for car loans, credit cards, 2nd mortgage loans, etc. quit coming in the mail to my house?

    Anybody know a mailman who will store it at their home?

  • OrdinaryCitizen Sep 29, 2008

    "This whole mess started in 1977 (under Carter), revived in 1999 (under Clinton) where it really took a life of its own, and was revised under Bush. "

    Personally, I don't care who started the mess but there is a long term of abuse over the years and nothing was done to control it. I don't want to hear it was the dems or repubs. It was abused and many need to give money back or face jail time. The real issue is that we have many voting on this who have more money than most of us well ever see in our day and they get to vote on this. Should I blame a cousin who was suggesting zero interest loans? Yes, and he deserves to give back all his salary, commission and jail time for not educating his clients. He was one small part in this and I could see this coming a mile along. He wasn't even qualified for the job but could talk anyone in taking these loans with bogus sales materials.

  • blackdog Sep 29, 2008

    ...well...the nekki is down 5 points at opening, less than the 7% expected a few minutes ago as the ripple effect rolls across the globe. We refused to agree on the bailout package of $700 b and the dow lost close to a trillion -trillion point four. An agreement must be reached soon. These effects are exponential.

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