JEDDAH/WASHINGTON: The House of Representatives yesterday defeated a $700 billion emergency rescue plan for the US financial system, ignoring urgent warnings from President George W. Bush and congressional leaders of both parties that the economy could nosedive into recession without it.
Stocks plummeted on Wall Street even before the 228-205 vote to reject the bill was announced on the House floor.
Bush and a host of leading congressional figures had implored the lawmakers to pass the legislation despite howls of protest from their constituents back home. Despite pressure from supporters, not enough members were willing to take the political risk just five weeks before an election.
Ample nay votes came from both the Democratic and Republican sides of the aisle. More than two-thirds of Republicans and 40 percent of Democrats opposed the bill.
The overriding question for congressional leaders was what to do next. Congress has been trying to adjourn so that its members can go out and campaign. And with the Nov. 4 election day looming, there was no clear indication of whether the leadership would keep them in Washington. Leaders were huddling after the vote to figure out their next steps.
Bush disappointed
A White House spokesman said that Bush was “very disappointed.” “There’s no question that the country is facing a difficult crisis that needs to be addressed,” Tony Fratto told reporters. He said the president will be meeting with members of his team later in the day “to determine next steps.”
John Sfakianakis, chief economist at SABB (The Saudi British Bank), said “The failure of the US political elite to find a quick resolution has demonstrated that the debate about the bailout is touching the core of the modern Anglo-Saxon capitalist system. The debate is interesting. Republicans opposed the bailout due to its intrusiveness of the government in the economy. Democrats criticize the bailout due to its unfairness. The plan is seen as a subsidy to investors at taxpayers’ expense. Investors who took risks to earn profits must also bear the losses.”
He added, “I have doubts whether the bailout, in its current form, would be enough to unclog the financial system as house prices appear likely to keep falling for some time. The bailout will not completely rebuild trust between banks as risk-reduction at money market funds still pose systemic problems. In other words, the forces of deleveraging are overwhelming, and so the credit crunch will remain over the next few quarters. As a result, the US economy would be virtually stalled over the next year,” he said, adding, “If we look at the top 20 US banks by assets and make a rough stab at how much of their assets will be eligible for the $700 billion Troubled Assets Relief Program (TARP), only 15 percent of the assets would be eligible.”
Global convulsions
Global markets went into convulsions yesterday after US lawmakers rejected the bailout plan, raising the prospect of deeper financial turmoil.
The Dow Jones Industrial Average plunged 777 points — one of its biggest drops ever — on the news and then swung wildly as investors tried to gauge the next step for the plan.
The Dow fell 777.68, or 6.98 percent, to 10,365.45. The decline also surpasses the 721.56-point intraday decline record also set during the first trading day after the Sept. 11 attacks. The Standard & Poor’s 500 index declined 106.85, or 8.81 percent, to 1,106.42. The technology-heavy Nasdaq composite index fell 199.61, or 9.14 percent, to 1,983.73.
In London, the FTSE index of leading shares lost 5.30 percent to 4,818.77 points, breaching the key support level of 5,000 points.
In Paris, the CAC-40 tumbled 5.04 percent to 3,953.48 points and in Frankfurt the DAX shed 4.23 percent at 5,807.08 points, with both markets plunging through support at 4,000 and 6,000 points respectively.In Asia earlier yesterday, Japanese share prices lost 1.26 percent, Hong Kong lost 4.3 percent and Sydney was down 2.0 percent.
“This is a blow to expectations of a US government rescue of the financial system and it will certainly affect all markets, including those in the GCC region, Brad Bourland, chief economist at the Riyadh-based Jadwa Investment, said. All seven markets in Gulf Cooperation Council states slumped in the past three months, and $150 billion has been wiped off their capitalization since the end of last year.
The states have seen all the gains of 2008 wiped out. Bourses in five states, including Saudi Arabia, plummeted more than 20 percent between June and September, led by the tiny market of Muscat. Kuwait’s Al-Shall Economic Consultants described trading in the Gulf markets as “highly volatile” as a result of the global financial crisis and local factors, including a weakening real estate sector in the United Arab Emirates.
Today, the markets start a five-day holiday marking the end of the holy month of Ramadan. The Saudi Tadawul All-Shares Index (TASI), the largest in the Middle East, ended the quarter at 7,458.50 points, down 20.2 percent. It has shed 32.4 percent since the start of 2008.
TASI dropped below the 7,000-point mark last week, but gained eight percent on Saturday and Sunday. All the market sectors, including the SABIC (Saudi Basic Industries Corp.) petrochemicals giant, dropped over the quarter.
Crude oil plunged more than $10 a barrel as investors scrambled in the face of panicked markets. New York’s main contract, light sweet crude for November delivery, tumbled $10.52 a barrel to close at $96.37. “It is unclear what the next step will be. It took days of painstaking negotiations to put together the deal, and congressional leaders and administration officials may have to go back to the drawing board,” said Augustine Faucher at Economy.com.
The legislation the administration promoted would have allowed the government to buy bad mortgages and other rotten assets held by troubled banks and financial institutions. Getting those debts off their books should bolster those companies’ balance sheets, making them more inclined to lend and easing one of the biggest choke points in the credit crisis. If the plan worked, the thinking went, it would help lift a major weight off the national economy that is already sputtering.
Several Republican aides said the leader of the House, Speaker Nancy Pelosi, a Democrat, had torpedoed any spirit of bipartisanship that surrounded the bill with her scathing speech near the close of the debate that blamed Bush’s policies for the economic turmoil. Without mentioning her by name, Rep. Adam Putnam, the No. 3 Republican, said: “The partisan tone at the end of the debate today I think did impact the votes on our side.”
— With input from agencies
