Now what?

The House, in a 228-205 vote, rejected a bill that would have been the most aggressive and ambitious government intervention in the financial markets since the New Deal. It is a political defeat to the Democratic and Republican leadership in the House and especially to President Bush and Treasury Secretary Henry Paulson, who had pushed aggressively for the measure. Both presidential candidates had also backed the bill.

The defeat stunned investors as well. Stocks plunged, with the Dow Jones industrial average falling 777.68 points, its steepest point drop ever. The S&P 500 fell 8.8 percent, its worst day since the market crash of 1987. The Nasdaq composite index plummeted more than 9 percent. Bloomberg News calculated that the stock market lost more than $1 trillion today. As a headline on MarketWatch.com put it: House to Wall Street: Drop Dead.

A "no" vote on the plan to buy troubled mortgages and mortgage-tied securities from financial institutions leaves Washington in a very tight corner. There was no Plan B to combat the credit crisis.  

House leaders, meanwhile, are "trying frantically to turn some 'no' votes into 'yes' votes by pointing to the damage being done on Wall Street" in a bid to get a second vote, the New York Times reports. The bill, should it get a second chance in the House and pass, is expected to have an easier time in the Senate. The Jewish holidays this week complicate efforts to revive the legislation.

Citing the collapses of Washington Mutual and Wachovia, Paulson said this afternoon: "This is too important to simply let fail."

Getting a swing of a dozen votes is not an impossible goal by any means. Still, since opponents, on both the Republican right and Democratic left, rejected the bill either on ideological grounds or on fear of losing reelection, it is unclear what changes could be made to persuade them to support the measure in a second vote.

If Congress fails to act before the election recess, what can we expect? There may just be more of the patchwork actions that have defined the government's response to the crisis to date. The latest came today with the sale of Wachovia's banking operations to Citigroup, in a deal orchestrated by the Federal Deposit Insurance Corp. and the Treasury Department.

The larger fear is that paralysis will again grip the credit markets, dragging the slowing economy deeper into a recession.

"If we defeat this bill today, it will be a very bad day for the financial sector of the economy," Representative Barney Frank, the Democrat chairman of the House Financial Services Committee, had warned before debate began on the House floor today.

Yet Rob Cox, for one, says on Breakingviews.com that while the investor freak-out is understandable, Financial Armageddon may not be upon us. 

He points to the government-orchestrated deals for Washington Mutual and Wachovia, as well as investments by Warren Buffett in Goldman Sachs and Mitsubishi UFJ in Morgan Stanley as evidence that "there are willing buyers alongside government mechanisms that can be employed to effectuate financial rescue."

There will be pain, he acknowledges, but without the asset-relief program, "the long-term result could be a beneficial restatement of sound market principle."

After the no vote, finger-pointing started on Capitol Hill.

A number of Republicans cited remarks during the debate by House Speaker Nancy Pelosi that blamed the Bush administration for the financial crisis. "We could have gotten it if it were not for this partisan speech that Speaker Pelosi gave," said the House minority leader, John Boehner, according to Politico.com.

At a news conference, Frank expressed amazement that Republicans would respond to the speaker's words by "putting feeling over country." To those Republicans who felt insulted, he said, he volunteered to go speak to them with "uncharacteristic niceness."

Before the House vote, the markets were already on edge. Earlier, Asian and European markets were roiled by a series of bank rescues in Europe.

To steady credit markets, the Federal Reserve and other central banks announced another coordinated effort to improve dollar liquidity this morning. The Fed will more than double its swap lines with the European Central Bank and other central banks, to $620 billion.

After the vote, the White House said the president would meet with his economic team this afternoon to plan what to do now.

Here are some highlights of the bill:

• The $700 billion would be doled out in stages, starting with $250 billion. Another $100 billion can be spent on the discretion of the president. Congress could make a decision on the remaining $350 billion. The program extends until the end of 2009.
• Banks and others that participate in the plan would issue warrants for common or preferred shares to the government. The idea is that taxpayers will reap the gains. If there are any.
• The hot political bullet is the compensation limit. Executives at companies that sell troubled assets to the government cannot get huge severance packages as long as the Treasury has a stake in the company. The impact of this seems to be minimal because it would not affect existing employment contracts.
• There will be oversight of the program—from a bipartisan congressional panel and the heads of a number of government agencies, including the Federal Reserve and the Securities and Exchange Commission.
• The Federal Reserve gets the authority to pay interest on reserves held at the central bank by financial institutions, giving it greater power over short-term interest rates.