The US House of Representatives tonight rejected a $700 billion bailout plan for the financial industry in a shock vote that sent global markets sliding as European authorities scrambled to prop up a slew of banks.
Even before the vote, Asian and European markets had plummeted on fears the crisis was spreading, while US regional lender Wachovia became the latest big bank to succumb to the crisis.
And global money markets were frozen even as central banks poured hundreds of billions of dollars into the financial system to persuade financial firms to stop hoarding cash.
The House of Representatives voted 228-to-205 against a compromise bailout plan that would have allowed the Treasury Department to buy up toxic assets from struggling banks. House Republicans, in particular, balked at spending so much taxpayer money just before the November 4th US elections.
"I can't believe they weren't able to come together and come up with a solution. Complete disaster was predicted if it didn't pass," said Stephen Berte, senior equity trader at Standard Life in Boston. "I can't see what the upside is right now."
The plan's defeat sent US stocks plunging, with the blue chip Dow Jones industrial average briefly posting its biggest drop ever - down 700 points. Latin American stocks tumbled 13 per cent, their biggest decline in more than a decade.
Investors rushed to assets considered a safe haven. Government bond prices and gold jumped, and oil fell below $99 per barrel on the view that world demand will contract as the financial crisis puts the brakes on economic activity. In Washington, the failure of the bailout bill - after more than a week of intensive closed-door negotiation intended to hammer out a compromise plan - brought new uncertainty about the response of the US government to the worst financial crisis since the Great Depression.
US President George W. Bush was set to meet economic advisers to consider the administration's next move after the White House failed to win support for the bailout plan from Bush's fellow Republicans.
"There's no question the economy is facing a difficult crisis that needs to be addressed," White House spokesman Tony Fratto told reporters.
The bailout plan was announced by the Bush administration last week. In the end, Republican House members voted against it by a more than 2-to-1 margin. A majority of Democrats voted in favour.
Rep. Barney Frank, a Massachusetts Democrat who helped craft the bill in hours of negotiations with leading lawmakers, said the next step could hinge on the economic fallout from the bill's failure.
Capping three hours of debate, House Majority Leader Steny Hoyer of Maryland had warned lawmakers that the cost of inaction would be an economic calamity beyond Wall Street.
"A meltdown would begin, it is true, on a few square miles of Manhattan, but before it was over, all of us know, no city or town in America would be untouched," Mr Hoyer said.
The high-stakes political showdown on the bailout proposal came after Wachovia Corp agreed to sell most of its assets to Citigroup Inc in a deal brokered by regulators.
Reuters