AFTER TEN days of fevered politicking on Capitol Hill over the Bush administration's $700 billion bailout for vulnerable banks, US stocks plunged yesterday as the House of Representatives voted against the measure.
Efforts immediately began to restore the plan, although it remains far from certain that Republicans who voted en masse against the measure would rethink their opposition.
The plan was the cornerstone of the Bush administration's strategy to restore stability in the financial system. It was at first derided as a blank cheque for Wall Street, but recalibrated in the course of long political negotiation to include measures to protect taxpayers.
Agreement on the terms of the legislation had done little to calm frayed nerves as US stocks opened sharply down yesterday morning. With traders on the floor of the New York Stock Exchange glued to television screens as the votes were counted at lunchtime, stocks dropped once it became clear that Mr Bush's Republican colleagues had staged a revolt.
The Standard Poor's 500 Index suffered its worst decline since 1987, sinking by as much as 7.2 per cent.
While the refusal of the House of Representatives to sanction the legislation surprised many observers, market participants had said earlier that the measure did not amount to a cure-all and would not immediately restore stability. As bank shares slid throughout the world, not least in Dublin, attention centred on Citigroup's emergency takeover of Wachovia's branch business and the public rescue of four European institutions.
A big spike in lending rates prompted the Federal Reserve to inject an additional $630 billion of liquidity into the system.
The manoeuvre, made before the House vote, suggests that it did not anticipate that the bailout, if passed by legislators, would provide a quick fix to the problems that have beset the system.
Even while legislators debated the finer points of the measure in the House of Representatives, shares in smaller US lenders came under severe pressure again yesterday as a result of Wachovia's difficulties. Although the deal values Wachovia's banking operations at $2.16 billion, Citigroup will have to absorb some $42 billion of losses on Wachovia's $312 billion loan book.
Thus the Street's response to the bailout plan had been far from euphoric. "It can't hurt, so that's one thing everyone can agree on," JPMorgan economist Mike Feroli told The Irish Times before the vote was taken.
"Even if it works as planned, it's not supposed to be a magic solution that immediately makes the credit markets start feeling better overnight."
The bailout was designed to provide relief to markets by taking toxic assets out of the system. The vote against the measure was 228 to 205, meaning its supporters came close to success. Now this controversial measure - characterised by Mr Bush as the crucial weapon in the battle to prevent the US slipping into a deep recession - hangs in the balance.
