Politicians, never terribly popular, will have been soundly cursed around the globe on Monday. After more than 10 days of wrangling between Democratic and Republican legislators and Hank Paulson, Treasury secretary, the hard-fought US bail-out evaporated in the House of Representatives. In spite of the leadership of both parties backing the deal, enough of their members sought to assert their independence by voting against the $700bn plan. It failed by 228 votes to 205.
It may be that the sense of panic that prevailed when Mr Paulson first brought the plan to Capitol Hill for consideration had ebbed. The failure of Washington Mutual and the rapid sale of Wachovia to Citigroup provided doubters with arguments that the system could already absorb the problems of ailing banks. Economists were lining up to quibble over the inadequacies of the plan as it stood. Suggested alternatives, such as directly recapitalising wobbly institutions, were gaining ground.
A monumental game of chicken is now under way between the waverers and the equity markets. Shocked by the vote into a rout, the Dow Jones Industrials closed down 7 per cent, or 778 points – its largest ever one-day loss in point terms. The rest of the world rapidly caught the chill, with the MSCI World index registering the greatest one-day drop since its inception in 1970.
What happens next? It may be the case that political game players can be talked round, having registered their disapproval. If not, the administration must find a creative method to put the weight of the government’s balance sheet behind that of the reeling financial sector, and soon.
To e-mail the Lex team confidentially click here
To post public comments click here
Lex is the FT’s agenda-setting column, giving an authoritative view on corporate and financial matters. It is also one of the few parts of FT.com available only to Premium subscribers. This article is provided for free as an example. A Premium subscription gives you unlimited access to all FT content, including all Lex articles and the FT mobile Newsreader.
If you have questions or comments, please email email@example.com or call:
US and Canada: +1 800 628 8088
Asia: +852 2905 5555
UK, Europe & Rest of the world: +44 (0)20 7775 6248