AP Photo/Richard Drew
Published Monday, Sept. 29, 2008 | 11 a.m.
Updated Monday, Sept. 29, 2008 | 2:07 p.m.
NEW YORK — Wall Street has ended a stunning session with a huge loss, with the Dow Jones industrials plunging more than 735 points — their largest point drop ever — after the failure of the financial bailout plan in the House.
Stunned traders on the floor of the New York Stock Exchange watched on TV screens as the House voted down the plan. And they saw stock prices tumbling on their monitors. The plan's failure means no one knows how the financial sector hobbled by hundreds of billions of dollars in bad mortgage bets will recover. The credit markets remain close to frozen as banks are too afraid to lend — including loans to to other banks.
The Dow is down about 738 points at the 10404 level.
Stocks began falling as the House voted against an unpopular $700 billion plan to rescue troubled financial companies and as investors examined a deal for Wachovia Corp.
The Federal Deposit Insurance Corp. said Monday Citigroup Inc. will acquire Wachovia's banking operations and that the deal protects Wachovia debtholders — a welcome prospect for investors given the strains in the credit markets. Investors had been worried about Wachovia's stability as it grappled with mounting losses over souring mortgage debt. Citi rose 69 cents, or 3.4 percent, to $20.84.
Investors appeared to find some reassurance in a move by the Federal Reserve and other countries' central banks to pump money into the world's credit markets.
The news comes as President Bush and congressional leaders looked to shore up support for the rescue measure, which they and many on Wall Street believe is a difficult but necessary step to revive moribund credit markets. Banks and other financial houses are hesitant to lend to one another because of fears about bad mortgage debt on companies' books.
Tight lending conditions make it hard and expensive for businesses and consumers to get loans, which can hurt the economy.
While congressional leaders said they had the headcount to pass the vote — a Senate vote could come as early as Wednesday — investors were likely to be unnerved until the votes are complete.
Credit markets remained strained Monday but improved after the Fed's injection. The yield on the 3-month Treasury bill, considered the safest short-term investment, fell to 0.75 percent from 0.87 percent late Friday. The yield was lower before the Fed's action. The yield on the T-bill falls as demand grows; investors are at times willing to take the slimmest returns to safeguard their principal. The yield on the benchmark 10-year Treasury note fell to 3.69 percent from 3.84 percent late Thursday.
Marc Pado, U.S. market strategist at Cantor Fitzgerald, said investors are nervous that lawmakers' response to credit troubles doesn't apply enough medicine to the financial system's wounds. He pointed to another round of troubles at banks in the U.S. and Europe.
"Things are dying and breaking apart while they sit there and vote on this thing," he said.
In early afternoon trading, the Dow fell 237.59, or 2.13 percent, to 10,905.54 after having been down more than 350.
Broader stock indicators also fell. The Standard & Poor's 500 index declined 47.17, or 3.89 percent, to 1,166.10, and the Nasdaq composite index fell 99.92, or 4.58 percent, to 2,083.42.
The dollar was mixed against other major currencies, while gold prices rose.
Light, sweet crude fell $8.32 to $98.57 on the New York Mercantile Exchange.
The pullback came as lawmakers prepared to vote on a different rescue plan than some had envisioned. There are new restrictions allowing Congress to limit how much of the money goes out the door at once. It also includes caps on pay packages of top executives as well as assurances that the government also would ultimately be reimbursed by the companies for any losses. The Treasury would be permitted to spend $250 billion to buy banks' risky assets, giving them a much-needed necessary cash infusion. There also would be another $100 billion for use at president's discretion and a final $350 billion if Congress signs off on it.
Pado also noted that many portfolio managers are looking to dump shares of financial companies and other poor-performers ahead of the end of the third quarter Tuesday. Managers don't want to have to report owning unpopular stocks and are instead looking to snap up more defensive stocks like consumer staples as well as boost their cash reserves.
"It's what drives window dressing," he said. "People are saying 'What has not fallen apart is what I need to show.'"
Indeed, health care and consumer staples stocks declined less than the rest of the market Monday. Johnson & Johnson slipped 5 cents to $69.35, while Kraft Foods Inc. rose 27 cents to $33.20.
Technology shares fall sharply as investors worried about slowing spending. Apple Inc. shares hit a 52-week low after analysts worried about weaker consumer spending lowered their ratings on the stock.
Apple fell $17.34, or 14 percent, to $110.90; its previous 52-week low was $115.44. Meanwhile, shares of Google Inc. fell $29.11, or 6.8 percent, to $401.93. Earlier in the session the stock dropped below the $400 mark for the first time since October 2006.
Investors also digested news that consumer spending in August fell to its lowest level in six months. The Commerce Department said spending remained unchanged rather than increasing 0.2 percent as economists had expected. It was the worst showing since February.
Personal incomes rose a better-than-expected 0.5 percent after falling 0.6 percent drop in July. But after-tax incomes fell by 0.9 percent. Incomes benefited in past months from the government's stimulus checks.
Wall Street is also worried about overall sluggishness in the world's economy. In the U.S., for example, unemployment now sits at a five-year high of 6.1 percent. That rate is expected to increase, perhaps putting further pressure on consumer spending, which accounts for more than two-thirds of the nation's economic activity.
For the Wachovia deal, Citigroup's acquisition will include five depository institutions and the assumption of debt. The FDIC said Citigroup will absorb up to $42 billion of losses on a $312 billion pool of loans. The FDIC said it would cover any additional losses. The FDIC gets $12 billion in preferred stock and warrants under the deal.
Investors overseas were nervous ahead of the votes in Washington and after three European governments agreed to inject Fortis NV with a $16.4 billion bailout. Fortis, with has headquarters in Brussels, Belgium and Utrecht, Netherlands, is Belgium's largest retail bank.
The British government said it is nationalizing mortgage lender Bradford & Bingley, which has a $91 billion mortgage and loan portfolio. It was the latest sign that the credit crisis has spread beyond the U.S.
Japan's Nikkei stock average fell 1.26 percent. Britain's FTSE 100 fell 5.30 percent, Germany's DAX index fell 4.23 percent, and France's CAC-40 fell 5.04 percent.