U.S. House Rejects $700 Billion Financial-Rescue Plan

By Alison Vekshin and Laura Litvan
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Sept. 29 (Bloomberg) -- The financial-rescue plan intended to restore confidence in the U.S. banking system collapsed in partisan wrangling as the House of Representatives voted down the proposal backed by the Bush administration and congressional leaders of both parties.

Markets plunged as the House rejected, by a vote of 228 to 205, the $700 billion measure to authorize the biggest government intervention in the markets since the Great Depression. The Dow Jones Industrial Average fell 778 points, or 6.98 percent to 10,365, the biggest point drop ever. The Standard & Poor's 500 Index fell 8.4 percent, the most since Oct. 26, 1987.

The legislation's defeat set off a scramble among the plan's backers for additional support before another vote. Majority Leader Steny Hoyer said the House may take up the measure again this week, possibly after Senate action.

``The Republicans killed this,'' said House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat. Republicans blamed Democratic House Speaker Nancy Pelosi of California.

Representative Adam Putnam of Florida, the No. 3 House Republican, said Pelosi's ``speech cost us votes'' because it set a ``partisan tone,'' a reference to her comment before the vote blaming Bush administration policies for the crisis.

Democrats voted 140 to 95 in favor of the legislation, while just 65 Republicans backed the bill and 133 opposed it.

Broad Authority

The legislation would have given Treasury Secretary Henry Paulson broad authority to buy troubled assets from financial companies to help ease a lending crunch triggered by the decline of the housing market.

President George W. Bush said he's ``very disappointed'' by the defeat in the House of his $700 billion plan.

``Our strategy is to continue to address this economic situation head-on,'' Bush told reporters before he met with his economic advisers. Paulson arrived at the White House minutes before the president's comment.

The Treasury secretary told reporters that lawmakers ``need to work as quickly as possible'' to pass a bailout package.

``The markets around the world are under stress,'' he said. ``Our toolkit is substantial but insufficient'' to fix the crisis and legislation is needed.

Paulson will consult with Federal Reserve Chairman Ben S. Bernanke and congressional leaders, as well as Bush, Michele Davis said.

Not Leaving Town

Senate Banking Committee Chairman Christopher Dodd, appearing before reporters with Senator Judd Gregg, a New Hampshire Republican, said a bailout plan could still pass Congress.

``We don't intend to leave here without the job being done,'' said Dodd, a Connecticut Democrat. ``While it may take another few days, we're confident that can happen.''

Barack Obama, the Democratic presidential candidate, called for calm after the House vote and said a rescue package would eventually pass.

``It's important for the American public and for the markets to stay calm,'' Obama said at a rally in Westminster, Colorado. ``There are going to be some bumps and trials and tribulations and ups and downs before we get this rescue package done.''

`Unnecessary Partisanship'

Republican presidential nominee John McCain told reporters, ``Senator Obama and his allies in Congress infused unnecessary partisanship into the process.''

Opponents said the measure was too risky and too costly.

``I fear that ultimately it may not work,'' Representative Jeb Hensarling, a Texas Republican, said before the vote. The plan may put the U.S. on the ``slippery slope to socialism,'' he said.

Lawmakers were reluctant to support the measure a month before congressional elections because some voters viewed it as ``bailing out Wall Street,'' Frank said.

``The American people rejected this bailout and now Congress did likewise,'' said Republican Representative Mike Pence of Indiana.

House appropriations committee chairman David Obey scoffed at assertions that Pelosi's speech turned Republicans against the package, sinking the bill. ``Do they really think it's credible to say that they changed their mind on how they were going to vote because of a speech?'' he said. ``If they're that tenderhearted, they don't belong in this place.''

`Anything-Goes Mentality'

In her speech before the vote, Pelosi said the Bush administration's policies were ``built on budgetary recklessness, on an anything-goes mentality, with no regulation, no supervision and no discipline in the system.''

The final plan considered by the House would have given Paulson an immediate $250 billion to buy bad loans from financial companies, with the rest to be doled out in stages.

He and Bernanke proposed the rescue plan to revive lending and restore the flow of credit to the U.S. economy. Opposition to their Sept. 20 proposal for almost unfettered authority to purchase assets has been strongest in the House, particularly among Republicans who balked at its cost and pressed for more taxpayer protections.

Compromise legislation reached yesterday included a proposal by House Republicans that provides for government insurance for mortgage-backed securities. The plan included a bipartisan oversight board to monitor the purchase and sale of assets, and imposed limits on the compensation of executives at participating companies.

Whipping Up Support

House Republican leaders today, in speeches on the House floor, urged their colleagues to support a bipartisan House and Senate compromise crafted over several days.

Still, lingering opposition from many Republicans prompted Democratic leaders, including Pelosi and Majority Whip James Clyburn, to circulate among Democrats on the House floor this morning to seek more support.

House Minority Whip Roy Blunt said the drop in the markets would pressure Congress to return to the issue.

``The reality of the impact this can have on the markets will have a big impact in getting people back to wanting to work together and get this problem solved,'' Blunt, a Missouri Republican, said at a press conference after the failed vote.

To contact the reporters on this story: Laura Litvan Washington at jarowley@bloomberg.netAlison Vekshin in Washington at avekshin@bloomberg.net