Shares plummet as US financial rescue plan fails (Roundup)

By Chris Cermak Sep 29, 2008, 20:56 GMT

A file photograph showing Trader Philip Clark Jr. working two phones while working in the euro dollar options pit. US stocks plunged more than 5 per cent 29 September 2008 after the US House of Representatives rejected a hotly debated 700-billion-dollar rescue plan for the US financial system. EPA/TANNEN MAURY

Washington - The US House of Representatives on Monday rejected a massive government plan to rescue the economy from the brink of financial meltdown, sending Wall Street stocks plummeting.

Democratic and Republican legislators traded blame for the failure but promised to head back to the drawing board in the coming days.

The House voted 228-205 against the 700-billion-dollar bail-out plan. Minority Republicans in the House led the opposition, voting 2- 1 against the bill.

The rejection came despite dire warnings of an economic collapse and support for the bill from congressional leaders of both political parties, as well as US President George W Bush.

US stocks plunged by the most in seven years on the news, with the three leading stock indices shedding massively. The Dow Jones Industrial Average lost 7 per cent; the S&P 500 shed 8.80 per cent; the Nasdaq high tech index dropped more than 9 per cent.

Bush said he was disappointed in the vote and would be consulting with his economic advisors in the coming days to work out a way forward.

'I was disappointed in the vote with the United States Congress on the economic rescue plan. We put forth a plan that was big because we got a big problem,' the president said.

'Our strategy is to continue to address this economic situation head on. And we'll be working to develop a strategy that will enable us to continue to move forward.'

Congressional leaders and White House officials thought they had forged an agreement Sunday after nine days of tough negotiations. But lower-level legislators in both parties derailed the process, resenting the need to put taxpayer money on the line to bail out greedy Wall Street investors.

'The legislation has failed, the crisis has not gone away, we must work in a bipartisan way in order to have another bite at the apple,' Democratic House Speaker Nancy Pelosi said.

The bill was intended to free up credit availability for US consumers with the government purchase of up to 700-billion-dollars worth of soured mortgage-backed securities. It included a 'repayment clause,' under which Wall Street would have to find a way to pay the money back if the assets' value did not recover in five years.

John Boehner, the top Republican in the lower chamber, promised to go back and find a compromise in the coming days. 'We need everybody to calm down and relax and get back to work,' he told reporters after the vote.

But it was unclear exactly when or how another compromise would come about. Many legislators opposed the measure on a principle that Wall Street must carry more of the burden and called it an unnecessary intervention into the free market.

'We can't allow the American taxpayer to become the insurance policy for financial decisions that didn't quite turn out as planned,' said Gresham Barrett, a Republican congressman from South Carolina.

Leaders from both parties had recognized the legislation was an incredibly bitter pill to swallow and one of the most difficult decisions Congress would ever make, coming just one month before the US general election.

But the bill's supporters, during a spirited four-hour debate in the chamber, said it was the only means of preventing credit - the backbone of the US economy - from drying up completely.

Republican Minority Leader Boehner blamed Pelosi for a partisan speech shortly before the final vote, which derailed a shaky truce and turned off a dozen or so Republicans that had been prepared to vote in favour. Democrats rejected the accusation.

During week-long negotiations on the 700-billion-dollar proposal, legislators reduced the initial cost to 350 billion dollars with the remainder to be authorized later.

Other changes to the plan originally drafted by US Treasury Secretary Henry Paulson included curbs on executive pay, greater oversight and methods for the government to take stakes in some companies that profit from the bail-out.

Bush, who has less than four months in office, has little remaining clout with his fellow Republicans in Congress, who already blame his low approval ratings for their loss of a majority in congressional elections two years ago.

Democrats were also worried about the political fallout of the unpopular Wall Street bail-out as expressed by constituents via angry e-mails and phone calls to legislators.

Meanwhile, the financial turmoil continued. The Federal Reserve announced fresh moves to inject liquidity into the market, while Citigroup Inc agreed to take over the banking operations of fourth- largest US bank Wachovia Corp.

The financial crisis has already led to two of the largest bankruptcies in US history - Lehman Brothers Holdings Inc and Washington Mutual Inc - as well as a series of government takeovers in the US and Europe.