Bailout rejected: Angry voters put pressure on pols

WASHINGTON — The nation's economy was put on hold Monday, and no one's sure what happens next.

The U.S. House rejected by a narrow margin a $700 billion bailout of financial markets, a startling defeat that triggered a taste of the financial chaos the plan was meant to halt: It sent the Dow Jones industrial average into a 777-point tailspin.

In the wake of the financial bloodletting, leaders of both parties, foes of the plan and Bush administration officials promised to restart talks in the next day and craft an alternative as soon as possible, although Congress likely won't come back into session before Wednesday evening at the earliest because of the Rosh Hashana holiday today.

"We've got much work to do, and this is much too important to simply let fail," said Treasury Secretary Henry Paulson.

Under the defeated proposal, the Treasury Department could tap up to $700 billion in taxpayer money in installments to buy troubled debt from financial firms, in the hope of freeing up credit to fuel normal economic activity.

Paulson and Federal Reserve Chairman Ben Bernanke had convinced leaders of both parties during the past week that a clog of bad mortgages and exotic real-estate investments was shutting down the lending system among banks that keeps money circulating through the economy.

Experts had warned that although much of the damage had been confined so far to financial firms, the whirl of doubt eventually would catch people and businesses seeking loans for making payrolls, buying vehicles or paying for college.

"If we don't act, and fast, a lot of people are going to lose their jobs," said Rep. Judd Gregg, R-N.H.

Key to the 228 to 205 defeat was a group of House Republicans opposed to a massive government interference, combined with Democrats who said the bill did not do enough for everyday Americans. In the final tally, 140 Democrats and 65 Republicans voted in support, opposed by 95 Democrats and 133 Republicans, a mix of conservatives, liberals and, significantly, members in tough re-election fights.

The Senate, where only 34 of 100 seats are up for re-election on Nov. 4, is expected to pass the legislation easily.

Lawmakers on both sides pointed to an outpouring of opposition from deeply hostile constituents, just five weeks before every seat in the House was up for election, as a fundamental reason that the measure was defeated. House members in potentially tough races and those seeking Senate seats fled from the plan in droves.

"People's re-elections played into this to a much greater degree than I would have imagined," said Rep. Deborah Pryce of Ohio, a former member of the Republican leadership who is retiring this year and voted for the plan.

Democrats who control Congress balked at supporting the administration-initiated "Emergency Economic Stabilization Act" until they were assured a large number of Republicans would join them.

Democrats accused Republicans of failing to deliver a sufficient number of votes. "Sixty-seven percent of the Republican Conference decided to put political ideology ahead of the best interest of our great nation," the Democratic whip, Rep. James Clyburn of South Carolina, said after the vote.

Rep. Roy Blunt of Missouri, the Republican whip, said that before the vote he had tallied 75 votes in his conference in favor of the plan. By the time the votes were cast, the Republicans could deliver only 65 of them.

Other top Republicans pointed at what they saw as a partisan speech by Speaker Nancy Pelosi in advance of the vote as a factor — a charge Democrats derided.

Pelosi accused Bush of squandering the budget surpluses of the Clinton years. "They claim to be free-market advocates, when it's really an anything-goes mentality," she said. "Right here is the reason I believe why this vote failed," said Rep. Eric Cantor, R-Va., holding a copy of Pelosi's speech, which he said "frankly struck the tone of partisanship that frankly was inappropriate in this discussion."

Rep. Barney Frank, D-Mass., said Republicans were "covering up the embarrassment of not having the votes."

"Because somebody hurt their feelings, they decide to punish the country? I wouldn't have imputed that degree of pettiness and hypersensitivity," Frank said.

Rep. John Boehner of Ohio, the House Republican leader, said he tried repeatedly and unsuccessfully to sway a handful of holdouts, but eventually gave up.

Despite the joint leadership effort to corral votes, a ragtag collection of backbench lawmakers in both parties organized their own counteroffensive.

Rep. Darrell Issa, R-Calif., led a bipartisan group that thought much of the financial crisis could be resolved with an administrative rule change by the Securities and Exchange Commission (SEC). He invited William Isaac, a consultant to the financial industry and a former chairman of the Federal Deposit Insurance Corp., to the Capitol on Sunday and yesterday.

Isaac argued that the proposed bailout package would do little to solve the financial crisis, which he said had been caused in part by the SEC's accounting rules that had unnecessarily forced banks to claim huge paper losses on mortgage-backed assets. As the House debate began Monday, about 90 lawmakers from both parties gathered in the Capitol basement for a briefing by Isaac. Republicans looking for a much cheaper alternative to giving Paulson the authority to purchase up to $700 billion in troubled assets, leapt at the idea.

"This is an artificial crisis. This is a crisis of choice, not necessity," Issa said after the vote.

"It was a revolution by the troops," said Michael A. Genovese, director of the Institute for Leadership Studies at Loyola Marymount University in Los Angeles. "The generals were saying, 'Follow me,' and they didn't."

Rep. Mike Pence, R-Ind., a leader of House conservatives who opposed the bill, suggested the plan would need revisions to attract more Republican votes.

"It will be important that Congress ... devise an alternative that reflects the American people's commitment to free markets and limited government," Pence said. "The American people rejected this bailout, and today, Congress did likewise."

Some strategists suggested that Democratic leaders try to pass the bill solely with Democratic support. But Pelosi and other Democrats have said that the plan is not theirs but the Bush administration's, and that both parties should share in the outcome's blame or credit.

At the White House, President Bush said he would meet with his economic advisers and develop a plan to move forward.

Chairman Frank couldn't say if leaders will try to tweak the bill that failed or come up with a new, easier-to-explain plan.

"That's a question we have to address," Frank said.

"I don't know that we know the path forward at this point," Boehner said.

Opponents of the measure said they anticipated that administration and congressional leaders would try again on a rescue proposal and were not worried about being held responsible for the stock decline or other economic uncertainty.

"I think we will be back in a couple of days with a proposal more palatable to more members," said Rep. John Yarmuth, a Kentucky Democrat who voted against the plan. "You don't make the biggest financial decision in the history of this country in a few days' time, without hearings."

"Stay tuned," said Pelosi.

Compiled from the Detroit Free Press, the Los Angeles Times, McClatchy Newspapers and The Washington Post