Lawmakers Reject Bailout Plan

NEWYORK/WASHINGTON (Reuters) – U.S. lawmakers rejected a $700 billionbailout plan for the financial industry in a shock vote that sentglobal markets sliding as the world credit crisis claimed more banks.

By a vote of 228-to-205 the House of Representatives rejected acompromise plan that would have allowed the Treasury Department to buyup toxic debt from struggling banks.

The plan’s defeat sent U.S. stocks down sharply, with the Dow Jonesindustrial average briefly falling more than 700 points, its biggestintraday drop ever.

Shares had already been under pressure following sharp declines inAsian and European shares on fears the crisis was spreading. Globalmoney markets remained frozen, even as central banks poured in cash inan attempt to boost liquidity.

Capping three hours of debate on Capitol Hill, House Majority LeaderSteny Hoyer of Maryland had warned lawmakers that the cost of inactionwould be an economic calamity beyond Wall Street.

"A meltdown would begin, it is true, on a few square miles ofManhattan, but before it was over, all of us know, no city or town inAmerica would be untouched," Hoyer said.

When the contentious bailout plan was announced by the Bushadministration last week, some House Republicans balked at spending somuch taxpayer money just before U.S. elections.

Republican House members voted against the bailout by a more than 2-to-1 margin. A majority of Democrats voted in favor.

President George W. Bush had urged lawmakers to pass the bailoutpackage quickly, saying it was needed to keep the financial crisis fromspreading.

The showdown on the bailout proposal came too late for WachoviaCorp, which agreed to sell most of its assets to Citigroup Inc in adeal brokered by the Federal Deposit Insurance Corp.

The Dow Jones industrial average was down more than 4 percent andthe broader S&P 500 index was down nearly 6 percent. Oil fell $8 abarrel.

Earlier, European shares dropped to a three-and-a-half year closing low with bank shares weighing heavily.

"Investors are fearful, frenetic, especially when it comes tobanking shares. They want to get out now and see the after effects fromafar," said Frank Geilfuss, head analyst at Bankhaus Loebbecke.

Around the world, investors were dumping assets they regarded asrisky. World stocks were down sharply, while gold and U.S. Treasuriessurged in the rush to safety.

The world’s central banks, led by the U.S. Federal Reserve,announced a $330 billion expansion of currency swap arrangements, whichallows them to increase the amount of money they can provide in theirhome markets, effectively throwing more money at the crisis.

Earlier, the governments of Belgium, the Netherlands and Luxembourgmoved to partly nationalize Belgian-Dutch group Fortis NV with aninjection of more than $16 billion, and German lender Hypo Real EstateHolding AG secured a credit line from the German government and banksof up to 35 billion euros.

British mortgage lender Bradford & Bingley Plc was brought underthe government’s wing, shares of French bank Dexia tumbled on a reportthat it might need emergency capital, and bank rescue deals alsoemerged in Iceland, Russia and Denmark.

"The contagion is spreading to mainland Europe and everyone’sasking, ‘Who’s next?’" said Mark Sartori, head of European salestrading at Fox-Pitt, Kelton in London.

The Wachovia deal is the latest in a series of events that hastransformed the American financial landscape and wiped out hundreds ofbillions of dollars of shareholder wealth.

The changes include the government takeover of mortgage financecompanies Fannie Mae and Freddie Mac, the bankruptcy of Lehman BrothersHoldings Inc, the failure of giant savings and loan Washington Mutual,and Bank of America Corp’s purchase of Merrill Lynch & Co Inc.

(Additional reporting by Patrick Rucker in Washington, PhilipBlenkinsop in Brussels, Reed Stephenson in Amsterdam, Jan Dahinten inSingapore, Andrew Callus in London, and Krista Hughes in Frankfurt;editing by John Wallace and Jeffrey Benkoe)