Bailout defeat sends markets reeling

TIM HARPER AND RITA TRICHUR
TORONTO STAR
A stunning rejection of a $700 billion financial bailout package by the U.S. House of Representatives yesterday sparked a historic North American stock market selloff, and left the United States in a crisis with no end in sight.

During an emotional afternoon in which the House dissolved into partisan finger-pointing, the bill was defeated 228-205 and, even before the voting was complete, the Dow Jones index began a freefall that ended with a loss of 777 points and $1.2 trillion in market value.

Toronto's S&P/TSX composite index collapsed into a sea of red after shedding a whopping 840.93 points to close at 11,285.07. The benchmark index had fallen by more than 900 points at one point during the session, buckling under the weight of tumbling energy and financial shares.

While it managed to recover from that low point, yesterday's 6.93 per cent decline was the index's steepest one-day percentage drop in nearly eight years. With only one trading day left in September, the TSX is poised for its worst monthly performance in about a decade.

The next move in Washington was unclear.

Both sides pledged to go back to work at crafting a package that can pass muster, but Congress now goes dark until Thursday.

More than two-thirds of Republicans, as well as 40 per cent of Democrats voted against the bill.

The vote had reverberations on the campaign trail in both Canada and the United States.

NDP Leader Jack Layton demanded an emergency leaders' meeting as chaos on Bay Street and Wall Street mounted.

Prime Minister Stephen Harper rejected Layton's request and the Conservatives continued to claim their party is the best bet to lead Canada at a time of economic instability.

Liberal Leader Stéphane Dion likened the Conservative approach to the economy to that of the Bush administration.

On the presidential campaign trail, Democrat Barack Obama counselled calm and urged Congress to get back to work.

"Get this done,'' Obama said. "Democrats and Republicans, step up to the plate and get this done.''

Republican John McCain, who dramatically suspended his campaign last week to deal with the crisis, accused Obama of a lack of leadership and said Democrats had torpedoed the effort with a last-minute partisan foray.

The defeated bill would have allowed the government to buy bad mortgages and other toxic assets from banks and financial institutions, relieving pressure so they would be in a position to free up credit. Until that happens, credit continues to be choked off by the troubled financial institutions, further slowing an already sputtering economy.

As it became clear the House bill was going to die, some members started shouting that the Dow was down more than 600 points and television screens around the world offered a jolting split screen of the market diving with every vote in the "nay" column.

In the end, House Republicans, faced with the pleadings of President George W. Bush and the anger of their constituents, turned their backs on the president.

They then attempted to blame Democratic House Speaker Nancy Pelosi, saying a speech she delivered on the floor blasting Bush economic policies had injected partisan politics into the effort to craft a bipartisan solution.

Bush and Treasury Secretary Henry Paulson expressed disappointment and pledged to go back to work, but Paulson looked particularly grim as he spoke to reporters at the White House.

"Markets around the world are under stress, and that reduces the availability of credit that businesses across America depend on to meet payroll and to purchase inventories,'' Paulson said.

"Families, too, feel the credit crunch, as it becomes more difficult to get car loans or a student loan.''

Bush, who last week used his prime-time television bully pulpit to warn Americans of dire consequences, spoke only briefly, pledging to redouble efforts with congressional leaders.

"We put forth a plan that was big because we got a big problem,'' Bush said.

Global banks have already taken some $590.8 billion in write downs and credit losses since the implosion of America's subprime mortgage market triggered the credit crunch last year.

With the IMF predicting losses could eventually top $1 trillion, banks are increasingly skittish about lending to each other.

"Nobody wants to lend money to anybody right now. The cost of funds is very high," said Andrew Martyn, a portfolio manager at Davis-Rea Ltd.

That crisis of confidence also has an impact on Canadian banks, even though they have relatively little exposure to America's subprime market or the troubled mortgage-backed securities that have brought down larger rivals.

Also weighing on market sentiment was Citigroup Inc.'s hastily-arranged takeover of Wachovia Corp. and the partial nationalization of a few European lenders.

Republican House leader John Boehner said he thought he had the votes until the last minute.

"Americans are angry and so are my colleagues. They don't want to have to vote for a bill like this, and I understand that,'' he said.

Republicans say they lost about a dozen votes at the last minute.

"The speaker had to give a partisan (speech) that poisoned our conference, caused a number of members we thought we could get to go south," Boehner said.

Pelosi countered that Democrats had held up their end of the bargain.