The United States government’s $700-billion bailout of the banking industry collapsed on Monday as Congress defied the White House by voting down the plan, sending Wall Street stocks plummeting and spreading shockwaves through the global economy.
In a snub to George Bush’s authority, Republicans in the House of Representatives led a rebellion that defeated the rescue by 228 votes to 205.
As alarm mounted on Wall Street about the stability of the financial system, the Dow Jones Industrial Average plunged by 777 points to 10 365 — its biggest percentage fall for seven years and its worst drop ever in terms of points.
The package was intended to allow the government to buy toxic mortgage-related liabilities from banks, after warning that without action banks would curtail home loans, car loans and student loans, as well as credit to keep small firms trading.
Bush, who had spent the morning phoning wavering Republicans, made a terse statement expressing ”disappointment” and pledged to develop a strategy to ”continue to address this economic situation head on”.
The Treasury Secretary, Henry Paulson, said he would work on an alternative plan. ”This is much too important to simply let fail,” he said.
Although most Democrats in the House backed the plan, two-thirds of Republicans voted against it. Many attacked it as a perversion of free-market economics and a departure from Reagan-style liberalism.
As recriminations began, Republican leaders blamed the Democratic speaker of the House, Nancy Pelosi, for framing the crisis as a consequence of recklessness by the Bush administration.
”The speaker had to give a partisan voice that poisoned our conference,” said Republican leader John Boehner. This drew ridicule from Democrats. Barney Frank, chairperson of the House financial services committee, said: ”Somebody hurt my feelings so I’ll punish the country? That’s hardly plausible.”
The negative vote is a blow to the Republican presidential candidate, John McCain, who briefly suspended his campaign last week to try to broker an agreement. He urged fresh efforts to find a deal, saying: ”Now is not time to fix the blame — it’s time to fix the problem.”
On Wall Street, there were groans as traders gathered around TV monitors to watch the vote. ”Everybody stood their with their mouths open,” said Sal Catrini, an executive director at JP Morgan in New York, who predicted that the uncertainty would send stocks plunging. ”We’re seeing real selling, but no buyers.”
Fourteen commercial banks have gone bust so far this year, and on Monday another troubled high-street name, Wachovia, was rescued in a takeover by Citigroup. In a Gallup poll for USA Today, 33% of Americans said they believed the country was in a depression.
The Mortgage Bankers’ Association reacted by warning of job losses as banks curtail credit to small businesses. Larry Fink, chairperson of a leading US investment management firm, BlackRock, said critics had been wrong to characterise the plan as a bailout of Wall Street. ”This is a bailout of Main Street,” he said. ”Banks have no ability to lend at the moment because their balance sheets are so gummed up.”
The financial fallout was swift and brutal. Shares in leading US banks slumped: Bank of America by 16%, Citigroup by 12% and Goldman Sachs by 11%. Oil plunged by $10 a barrel to just over $96 as traders bet on a slump reducing the need for fuel. The dollar fell sharply and the price of gold surged close to record territory.
Peter Morici, Professor of business at the University of Maryland, said: ”Things are going to get so bad something will have to be done in the next few weeks. Banks will sink, credit markets will seize, the economy will go into something much worse than a recession.” — guardian.co.uk