Stocks Plunge as House Votes on Bailout

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As voting began on the bailout bill in the House Monday afternoon, the Standard & Poor’s 500-stock index and the Dow Jones industrial average dropped sharply from its already depressed post.

Richard Drew/Associated Press

Traders on the floor of the New York Stock Exchange on Monday.

The Dow, which had been down almost 300 points fell almost 600 points in a matter of minutes, and the S.&P. 500, which had been off more than 4 percent, quickly moved to a decline of 7 percent.

The quick drop showed how on edge investors remained as another week dawned on the embattled canyons of Wall Street.

Shares fell even as federal lawmakers hammered out an agreement on the government bailout plan and Citigroup snatched up the core business of Wachovia, the ailing banking giant. The Wachovia move, which was spearheaded by federal regulators, could have been taken as a sign that the government was eager to restore stability to the financial system. But the near-collapse of Wachovia, which was the nation’s fourth-largest bank, may have underscored the troubling sense among investors that any bank is vulnerable in the current crisis.

The world’s credit markets also remained under pressure. Yields on Treasuries dropped and lending rates stayed high, signs that investors remained deeply ill at ease about the health of the financial system.

Responding to the strain, the Federal Reserve moved to vastly increase the amount of liquidity it makes available to major players in the world financial system. The Fed will triple the size of its regular auctions for banks and work with nine other central banks to increase the flow of credit.

The Fed is hoping to combat a hoarding mentality that has arisen among banks, whose reluctance to lend — even to healthy institutions — has jammed up critical financial arteries that many small businesses depend on.

On Monday, the cost of borrowing euros for a three-month period rose to the highest price on record. Banks are charging enormous premiums for short-term financing. And money continued to flow into the safe space of Treasury bills and traditional hedges like gold, the price of which rose 2.2 percent.

Shares of Wachovia lost 90 percent of their value in electronic overnight, but the stock never opened on Monday morning as officials halted trading before the opening bell.

Citigroup shares fell, and shares of financial stocks traded lower. Morgan Stanley fell 11 percent and Goldman Sachs was off 8 percent.

European stocks, already sharply down at the New York open, fell further after the declines on Wall Street. Stocks in London and Paris were down more than 5 percent, and Frankfurt was down about 4 percent. In Asia, the benchmark Hong Kong index plummeted 4.3 percent overnight; Tokyo’s Nikkei 225 lost 1.2 percent.

President Bush appeared outside the White House at 7:30 a.m. on Monday, before the markets opened, to endorse the bailout legislation that was agreed upon over the weekend.

“A vote for this bill is a vote to prevent economic damage to you and your community,” the president said in a brief statement. “The impact of the credit crisis and housing correction will continue to affect our financial system and growth of our economy over time. But I am confident that in the long run, America will overcome these challenges.”

The problems in Europe came after government bailouts of several banks, including the British lender Bradford & Bingley and the Belgian-Dutch financial group, Fortis.

If anything, the moves created uncertainty about which institution would be next, said Jean Bruneau, a trader at Société Générale in Paris.

Shares of the Brussels-based lender Dexia fell 22.7 percent as investors worried that it might be the next bank to need government help. The company may soon announce a plan to raise capital, the French newspaper Le Figaro said, without citing a source.

The agreement on Capitol Hill on the terms of the bailout package failed to lift the mood in Europe.

“The U.S. bailout doesn’t change some negative short-term factors — that the economic outlook is weak and that the earnings outlook is weak,” said Tammo Greetfeld, a strategist at UniCredit Markets & Investment Banking in Munich. “The key question is can the bailout create enough optimism among investors that they focus on the medium-term improvement and ignore short-term weakness. We’re not there yet, the benefits look to be too far down the road.”

The dollar gained against the euro and the pound, and was stable against the yen.

Stock markets in Asia fell on renewed fears of a global credit crunch, erasing earlier gains that came after the weekend agreement on Capitol Hill.

The Standard and Poor’s/Australian Stock Exchange 200 Index fell 2 percent after rising slightly on Monday morning. The Kospi Index was down 1.3 percent after an early 1.2 percent surge in Seoul.

Bradford & Bingley, the British lender, was seized by the government after the credit crisis shut off financing and competitors refused to buy mortgage loans that customers were struggling to repay.

Banco Santander, the Spanish lender, will pay $1.1 billion to buy Bradford & Bingley branches and deposits, the Treasury said. Santander shares declined 2.8 percent, to 10.61 euros. Shares in UBS, the Swiss bank, fell 7.7 percent.

The stock market in Taiwan was closed on Monday as Typhoon Jangmi passed directly over Taipei. Mainland China’s stock markets in Shanghai and Shenzhen are closed this week as part of a national holiday marking the establishment of China as a Communist country in 1949.

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