Crashing down
Bailout rejected; new bill vowed
WASHINGTON - President Bush and congressional leaders, stunned by the defeat of a $700 billion Wall Street bailout plan yesterday, vowed to quickly craft a new proposal to win over skeptical lawmakers before the worst financial crisis in generations deteriorates into a widespread economic meltdown.
The stinging rejection of Bush's plan by the House of Representatives - by just 23 votes - sent the stock market into a nosedive of historic proportions. It also injected uncertainty into whether the Senate will take up the measure as expected tomorrow, or whether any bill can garner enough public support and calm a jittery market.
Bush said yesterday he was "disappointed" with the House vote and said he intended to lobby Congress, including recalcitrant members of his own party who helped kill the bill. But the vote was a sign of his waning influence: It came just days after Bush delivered a prime-time speech to sell the plan and pressure lawmakers.
"We'll be working with members of Congress," he told reporters at the White House. "Our strategy is to continue to address this economic situation head-on."
Later, Treasury Secretary Henry Paulson grimly said he has "significant tools in our tool kit" to fix the economy, but they are "insufficient" to solve the biggest economic crisis since the Great Depression without a government bailout deal. Paulson, who would have obtained unprecedented power to shore up ailing firms under the defeated plan, pledged to renew negotiations with lawmakers. "I will continue to work with congressional leaders to find a way forward to pass a comprehensive plan to stabilize our financial system and protect the American people," Paulson said after emerging from a White House meeting. "We need to get something done."
In the meantime, Wachovia Corp., one of the nation's largest banks, yesterday joined a growing list of leading financial institutions whose bad-mortgage-related debt has led them to the brink of collapse. In a deal facilitated by the Federal Deposit Insurance Corp., Citigroup will absorb as much as $42 billion in Wachovia losses, while the FDIC will cover the rest.
Moments after the vote, House members streamed into the hallways of the Capitol and pointed fingers at the opposition.
House Financial Services chairman Barney Frank of Massachusetts, a Democrat who played a key role in negotiations over the bill, noted that Republican presidential nominee Senator John McCain boldly announced he would suspend his campaign and come to Washington to help broker a deal. In the end, Frank said, McCain "couldn't even get one-third of his caucus" to support the measure.
But 95 Democrats - including John Tierney, Stephen Lynch, and William Delahunt of Massachusetts - also voted no out of concern the plan would do nothing to help average Americans who have lost their homes in record numbers but were being asked to help foot the bill to save Wall Street firms.
Representative Henry Cuellar, a Texas Democrat, said the bill was too focused on helping Wall Street. "This puts the burden of all this on the taxpayers," Cuellar said, as he pulled up the latest stock market report on his iPhone, which at that point showed the Dow Jones Industrial Average dropping 508 points.
Last week, after a string of major financial institutions were taken over or failed, Bush and Paulson urged Congress to let Paulson spend the $700 billion to relieve Wall Street of massive debt that is dragging down the US economy. Leading Democrats and Republicans in the House and Senate grumbled but quickly drafted a bill that included significant restrictions and oversight.
It fell apart when a group of breakaway Republicans - led by House minority leader John Boehner of Ohio - presented an alternative deal, using government-backed insurance for firms holding bad debt rather than bailing them out with nearly $1 trillion in taxpayer money.
The breakdown was a blow to Bush, who had set up a high-profile White House meeting and invited McCain and Barack Obama, his Democratic rival.
Over the weekend, lawmakers and their staffs worked until late at night working through key sticking points from each side, including the insurance proposal, taxpayer protections, limits on executive compensation, and strict oversight. On Sunday, congressional leaders announced the deal was on again, and House Speaker Nancy Pelosi, a California Democrat, called for significant Republican support in order to get the bill passed.
The fate of the bill was uncertain until the final minutes.
Boehner, who had vowed last week that Democrats and the White House could not pressure him into backing the bill unless it was changed to his liking, took the dramatic step of announcing his support to a packed House chamber just before the vote. "Nobody wants to vote for this, nobody wants to be around this," Boehner said, but members must act to avert "economic disaster."
House majority leader Steny Hoyer, a Maryland Democrat, followed. He declared that he and Boehner "speak with one voice" in supporting the legislation. Members of both parties gave a standing ovation to both Boehner and Hoyer, leading some observers to conclude that passage was likely.
Pelosi also called for bipartisanship in her floor speech, but she angered some Republicans when she declared that the crisis was "only a part of the cost of the failed Bush economic policies to our country."
When the vote was called, too many rank-and-file members on both sides of the aisle refused to sign off on a plan they saw as a blank check to Wall Street to save it from its own recklessness while doing little to help average Americans facing home foreclosures.
"When government relieves companies from the negative consequences of their bad decisions, it encourages more irresponsible conduct," said Representative John Shedegg, Republican of Arizona. "My colleagues and I could not support a measure that would increase the involvement of the government in the financial services market without implementing safeguards against further damage."
Wall Street reeled from the growing opposition to the bill, plunging as the votes were tallied. By the end of the day, the market posted its worst one-day percentage drop in more than a decade, while the Dow Jones Industrial average plunged nearly 800 points, the largest single point drop in American history.
After the vote, Boehner blamed Pelosi. He said she "had to give a partisan voice that poisoned our conference [and] caused a number of members, who we thought we could get, to go south." House minority whip Roy Blunt said a dozen Republicans switched to a "no" vote after the Pelosi speech.
Democrats, however, ridiculed the notion that the speech by Pelosi was the decisive factor. Frank said he found it hard to believe that a dozen Republicans voted against the bill "because people's feelings were hurt."
Blunt, a Missouri Republican, said that despite the setback, he would try to persuade members of his party to vote for a new version of the bill. "We're going to be talking to our members and see how we can come together in the next few days to reverse whatever negative impact there may be in the economy over the next few days because Congress has failed to act," Blunt said.
Bryan Bender can be reached at bender@globe.com. 