Stocks Dive As House Defeats Bailout Bill
Steve Schaefer, 09.29.08, 1:50 AM ET
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Stocks plunged after the House of Representatives failed to pass a bailout proposal aimed at shoring up America's financial services industry.
With a vote of 228 to 205, the measure was defeated, as Republicans delivered fewer votes for the proposal than House leaders expected. Ninety-five Democrats joined 133 Republicans to vote down the bill.
Within seconds the Dow had lost nearly 700 points, or about 7.0%, on a knee-jerk reaction before trimming the initial loss. Lately the Dow was down just over 300 points.
Earlier Monday, the Federal Reserve made another effort to loosen up credit markets that have all but ground to a halt. On Monday, central banks around the world announced a coordinated effort to expand U.S. dollar liquidity.
The Fed increased its 84-day Term Auction Facility auctions by $50.0 billion, instituted two new TAF auctions in November to reassure markets that term funding will be available over year-end and expanded its currency swap lines with the Bank of England, Bank of Japan, European Central Bank, Swiss National Bank and others by $330.0 billion.
Monday's actions come as credit markets have seized up, with lending rates between banks increasing, while financial institutions shy away from taking any additional risk, no matter how modest, onto their cash-strapped balance sheets. The overnight London interbank offered rate was up to 2.57%, from 2.31% Friday, while three-month Libor was at 3.89%, up from 3.76%.
Investors took little solace in the Fed's latest liquidity measures, sending stocks sharply lower on Wall Street. With the House debating the bailout package and heading toward an early afternoon vote, stocks were near their worst levels of the day. The Dow was off 312 points, or 2.8%, to 10,831; while the S&P 500 dropped 66 points, or 5.4%, to 1,147; and the Nasdaq lost 66 points, or 5.5%, to 2,063.
The $700.0 billion bailout proposal includes provisions to limit executive pay in certain cases, and will give Treasury Secretary sweeping authority to determine which institutions will have access to the facility and how much will be paid for toxic mortgage-backed securities. (See "The Bailout: All Aboard.")
Meanwhile, the dollar was picking up some strength, as the euro faltered following a rough weekend for European financial firms. British bank Bradford & Bingley was nationalized, with the U.K. government selling some of its assets to Spain's Banco Santander, and Belgium's government took a 49.0% equity stake in Fortis. The euro fell to $1.4376, from $1.4626 Friday.
Oil prices were also softer, as the dollar firmed up and traders showed concern that even with a bailout, demand is unlikely to rebound enough to send black gold back to its record levels. Crude fell $6.54, to $100.35 a barrel.
Citigroup (nyse: C - news - people ) was among few gainers in the U.S. financial sector, after the bank agreed to an FDIC-brokered deal to pick up the banking assets of Wachovia (nyse: WB - news - people ). Unlike when JPMorgan Chase (nyse: JPM - news - people ) acquired assets from Washington Mutual (nyse: WM - news - people ) after they were seized by regulators, Wachovia's subordinated debt holders will not be wiped out. Meanwhile, the FDIC is accepting some risk in the deal, covering any losses on Wachovia's $312.0 billion loan portfolio greater than $42.0 billion, in return for $12.0 billion in preferred stock and warrants. (See "Citigroup Swallows Wachovia.")
Citigroup, which also halved its dividend and said it plans to raise $10.0 billion in common equity, was up $1.09, or 5.4%, to $21.24, but virtually all of its peers were contributing to the day's broader losses. Trading in Wachovia shares had not yet reopened, but Morgan Stanley (nyse: MS - news - people ) fell $1.77, or 7.2%, to $22.98, after announcing the details of a capital infusion from Mitsubishi UFJ Financial Group (nyse: MTU - news - people ). The Japanese firm is pumping $9.0 billion into the newly transformed bank, in return for preferred shares with a 10.0% dividend and a 9.9% common stake.
Morgan Stanley's rival Goldman Sachs (nyse: GS - news - people ), which is also transforming after the collapse of the standalone securities firm model, is said to be seeking up to $50.0 billion in assets from troubled U.S. banks as it transitions to a commercial bank. Goldman slid $9.05, or 6.6%, to $128.94 Monday
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