The stock market plunged Monday, as the House of Representatives voted down the $700 billion financial bailout package, sending the Dow Jones industrial down more than 600 points.
As the vote was shown on TV, stock prices fell sharply with the Dow dropping 700 points as investors fled to the safety of the Treasury markets on fears the financial system would keep sinking under the weight of failed mortgage debt.
The Dow tumbled 732.76, or 6.6%, to 10,410.37, according to preliminary calculations.
The Standard & Poor's 500 index declined 97.83, or 8.1%, to 1,115.44; the decline on the day represented a paper loss of more than $700 billion, S&P said.
The technology-heavy Nasdaq composite index fell 199.61, or 9.2%, to 1,983.73.
"The fear is we will get a worst-case scenario" for the economy, said Todd Leone, trader at Cowen & Co. "Wall Street is telling Congress to get this deal done."
Before the vote, Hugh Johnson, chief investment strategist at Johnson Illington Advisors, said a key first step to stabilizing markets was for the bill to be approved by the House. But that did not happen.
Major institutional investors were unsure if the bill in its current form would solve the credit crisis. But most thought passage of the bill would be better than no bill at all.
"The worst thing you can is nothing," BlackRock investment strategist Bob Doll said earlier in the day.
Frozen credit markets, which the government's plan was aimed at fixing, showed little signs of thawing, said Bill Hornbarger, fixed-income strategist at AG Edwards.
The yield on three-month Treasury bills, considered a super-safe investment, plunged to 0.39% from 0.84% on Friday. At one point early Monday, the yield went negative — meaning investors were willing to pay the government a premium to stash their money in a super-safe short-term IOU.
Similarly, the spread between three-month bank-to-bank lending prices in Europe, known as LIBOR, and the three-month T-bill widened sharply. The spread was almost 3.5 percentage points, up almost a half percentage point since Friday. Under normal market conditions the spread is two-tenths of a percentage point.
The wide spread shows banks are reluctant to lend to each other without being rewarded for the risk with higher interest rates.
"There is still a lot of stress in credit markets," says Hornbarger. "Investors want to hold the safest things they can until we get through this period."
Jitters were only increased by news that Wachovia Bank would be acquired by Citigroup, making Wachovia the latest U.S. banking institution to be leveled by the credit crisis.
Overnight, global stock markets posted losses as investors watched failures in Britain and Belgium. Shares were down sharply in Europe with Britain's FTSE 100 down 5.3%, Germany's DAX index 4.2%, and France's CAC-40 5.0%.
Asian markets closed down 1.3% in Japan, 4.3% in Hong Kong and 2% in Australia.
To compound matters, the third-quarter earnings reporting season is nearing, and investors fear profit warnings are likely to rise, Timothy Vick, a senior portfolio manager at Sanibel Captiva Trust says.