Emergency Economic Stabilization Act of 2008,
which would have made $250 billion immediately available to Treasury secretary Hank Paulson to purchase illiquid assets from bank balance sheets.
The proposal would also have allowed for the release of a further $100 billion at the behest of the President, while the remaining $350 billion would have required the legislature to accede to a written request by the President for the additional funds.
As news of the failed motion emerged from Capitol Hill early on Monday afternoon, the Dow Jones Industrial Average plunged 460 points in 15 minutes, from 10,900 points at 1.30pm New York time, to 10,440 points by 1.45pm. The collapse was mimicked on the S&P 500 index, which dropped from 1,171 points to 1,126 points over the same period.
The Dow ended the day down 778 points – the biggest fall in its 112-year history. The S&P 500 shed 106 points to end the day at 1,106 points – its biggest one day decline since Black Monday in October 1987.
After a compromise deal was thrashed out by the Treasury, the White House and Congressional leaders in a weekend of tense negotiations, the emergency authority was the subject of a hasty three-hour debate in the House of Representatives on Monday morning ahead of the vote, which took place around 1.00pm.
Political commentators were anticipating a tight vote, coming just five weeks before the presidential election, which would also see every member of the House and a third of the US Senate up for re-election. However, it was generally expected that partisan ideology would be put aside in an effort to put the needs of beleaguered US capital markets first.
According to House Democrats, speaking after the vote, an agreement had been reached among leaders on both sides that Republicans would provide 125 votes in favour of the plan, with Democrats providing another 125 in order to ensure the successful passage of the bill.
In the actual vote, however, just 65 Republicans backed the motion compared with 140 Democrats – a little over half the number of votes Democratic leaders say they were promised. Speaking after the vote, Republicans pointed out that 95 Democrats also voted against the measure and noted partisan comments by Speaker of the House, Nancy Pelosi, about the “failed economic leadership” of the Bush Administration served to dissuade 12 Republican congressmen from supporting the measure.
“Speaker Pelosi’s speech struck the tone of partisanship that was inappropriate in this discussion. It was a failure of Speaker Pelosi to listen to her own members and our members [that led to the failure of this vote]. This is not a partisan crisis and this caps off what has been the most unproductive year in Congress that I can remember in my lifetime,” said Republican deputy minority whip Eric Cantor.
Upon hearing Cantor’s accusation, however, Barney Frank, chairman of the House Committee on Financial Services, reacted angrily, pouring scorn on the suggestion and alleging that Republicans were simply attempting to mask the fact they never had the votes necessary to pass the bill in the first place.
“I am appalled. There is a terrible crisis affecting the economy but because somebody hurt their feelings, [the Republicans] decided to punish the country. I don’t believe they had the votes and they’re covering up their embarrassment. This is barely plausible.”
The future of the bailout now hangs in the balance. Although Democratic leaders insisted they will go back to work immediately to reach a compromise amenable to both parties, any progress looks set to be delayed by the Jewish New Year, which is observed Tuesday and Wednesday.
Questions also remain over how quickly any new compromise proposal can be drafted, debated and voted upon, given the 11 days it took for the current agreement to be rushed through to the House floor. Others also question whether watered down proposals will give the US Treasury the sweeping authority it feels it needs to resuscitate credit markets.
There is also concern about whether any more US financial institutions will face collapse while a new deal is in the works. On Monday, Citigroup announced it will buy North Carolina-based Wachovia’s banking subsidiaries, while Washington Mutual was acquired by JP Morgan last week.
See also: Citigroup to acquire Wachovia
CDS spreads push out as bailout drags on
Bailout saga pushes CDS spreads ever wider
JP Morgan acquires Washington Mutual
The House of Representatives voted 205 to 228 against passing the