U.S. House Rejects $700 Billion Financial-Rescue Plan (Update1)

Sept. 29 (Bloomberg) — The U.S. House rejected a $700 billion financial-rescue plan intended to restore confidence in the nation’s banking system, dealing a blow to government efforts to contain a lending crisis.

The House rejected by a vote of 228 to 205 the measure to authorize the biggest government intervention in the markets since the Great Depression.

The Dow Jones Industrial Average fell 458.3 points, or 4.1 percent, at 2:20 p.m. New York time.

“The American people rejected this bailout and now Congress did likewise,” said Republican Representative Mike Pence of Indiana.

The legislation would have given Treasury Secretary Henry Paulson broad authority to buy troubled assets from financial companies.

“I’m very disappointed,” said House Financial Services Committee Chairman Barney Frank. “The Republicans killed this.”

President George W. Bush personally lobbied lawmakers to support the measure today and said it’s needed to “help keep the crisis in our financial system from spreading throughout our economy.”

Federal Reserve Chairman Ben S. Bernanke warned of “grave threats” to the financial system if Congress rejected the plan.

Opponents said the measure was too risky and too costly.

“I fear that ultimately it may not work,” said Representative Jeb Hensarling, a Texas Republican, a leader of the opposition. The plan may put the U.S. on the “slippery slope to socialism,” he said.

Lawmakers were reluctant to support the measure a month before congressional elections because some voters viewed it as “bailing out Wall Street,” Frank said.

Flow of Credit

The final plan considered by the House would have given Paulson an immediate $250 billion to buy bad loans from financial companies, with the rest to be doled out in stages.

The compromise also included a proposal by House Republicans, whose objections scuttled an earlier agreement in principle, which provides for government insurance for mortgage- backed securities. The plan included a bipartisan oversight board to monitor to purchase and sale of assets, and imposed limits on the compensation of executives at participating companies.

Paulson and Bernanke proposed the rescue plan to revive lending and restore the flow of credit to the U.S. economy. Opposition to their Sept. 20 proposal for almost unfettered authority to purchase assets has been strongest in the House, particularly among Republicans who balked at its cost and pressed for more taxpayer protections.

House Republican leaders today, in speeches on the House floor, urged their colleagues to support a bipartisan House and Senate compromise crafted over several days.

Still, lingering opposition from many Republicans prompted Democratic leaders, including House Speaker Nancy Pelosi and Majority Whip James Clyburn, to circulate among Democrats on the House floor this morning to seek more support.

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