Dow Drops 778 Points as Congress Defeats Bailout Bill

Raw Video: House Defeats Financial Bailout

The United States House of Representatives voted against the $700 billion emergency rescue package for beleaguered financial companies.

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By Renae Merle

Washington Post Staff Writer
Monday, September 29, 2008; 5:29 PM

Spooked investors fled the market today after the House rejected the $700 billion financial plan to rescue the financial market.

The Dow Jones industrial average closed down about 778 points, at 10,365. That was nearly a 7 percent drop. The Nasdaq lost 200 points, about 9 percent, and the broader Standard & Poor's 500-stock index fell 106 points, a decline of nearly 9 percent.

The Dow's point drop set a new record, topping the sell-off in the wake of the Sept. 11, 2001, terrorist attacks, when the Dow lost nearly 685 points. The percentage drop was also one of the worst since 1987, when the Dow fell 22 percent in one day.

Today was also the worst drop for the tech-heavy Nasdaq since the Internet bubble burst in 2000. Investor fled to the safety of U.S Treasury bonds. Facing increasing demand, the yield on 2-year bonds, fell from 2.1 percent to 1.7 percent. A smaller yield reflects that investors are willing to accept less from their investment as they seek a safe place for their money.

Investors also sought safety in gold, pushing the price up $24 an ounce today, while oil prices fell $11 to $95 barrel in trading today.

After 11-days of negotiations and three hours of debate, the House rejected the plan pushed by Treasury Secretary Henry M. Paulson Jr. and President Bush as the best way to stabilize the financial market. It would have allowed the government to buy the bad debt, including risky mortgages, of financial firms.

Paulson warned that inaction would lead to a seizure of credit markets and a virtual halt to the lending that allows Americans to acquire mortgages and other types of loans. But opponents have argued it was a bailout of the Wall Street figures that had spurred the problems in the first place. It failed by a vote of 228-205.

Investors were shocked by the news and worried again that more banks will fail before this measure, or something similar, can gain support. "We thought we had a deal that was passable," said Art Hogan, chief market analyst at Jefferies & Co. "We're in trouble and the market is showing you where we're going if we don't have a rescue plan."

For many investors it was the manifestation of their worst fears, analysts said. Many doubted that the plan would be enough to address of all of the market's problems, but saw it as an interim solution until the economy's fundamental problems -- high unemployment and a high rate of housing foreclosures -- could be tackled.

If the bill is not revived, the Federal Reserve and other central banks will be forced to quickly deal with the fallout, including further tightening of credit conditions and upward pressure on borrowing spreads, said Brian Bethune, chief U.S. financial economist for Global Insight. "At a minimum we would be looking for the Federal Reserve to cut interest rates sooner rather than later," he said.

Lawmakers may take up the bill again and the continued debate will add even more volatility to the market, said Joseph Brusuelas, chief U.S. economist at California-based Merk Investments. "If Congress does not get its act together, we could see an increasingly sharp sell-off across all global markets," he said.

This comes at a crucial time, the end of the third quarter, when firms will be seeking to rollover short-term debt, said Brusuelas. Given the seizing up of the credit markets, if Congress does not come up with a plan it may be increasingly difficult for many firms to find short term financing to meet immediate debt requirements and basic payroll obligations.