For Stocks, Worst Single-Day Drop in Two Decades

By MICHAEL M. GRYNBAUM

Published: September 29, 2008

It was the Black Monday of 2008.

Stocks fell by nearly 9 percent on Monday ? the worst single-day drop in two decades ? after the government?s bailout plan, touted by its supporters as a balm for the current market stress, failed to pass the House of Representatives, setting off a fresh wave of anxious selling.

In yet another day that has shaken the embattled canyons of Wall Street, the Dow Jones industrials fell 777.68 points after it became clear that the legislation could not muster the support it needed to pass the House.

The broadest measure of the American stock market, the Standard & Poor?s 500-stock index, fell 8.77 percent, its biggest drop since October 1987. The Nasdaq composite index fell by more than 9 percent, after the House defeated the bill by a vote of 228-205.

The fear was most pronounced in the world?s credit markets, considered gauges of anxiety among investors. Yields on Treasuries plummeted after the House rejected the plan, with the one-month Treasury note yielding virtually zero.

Banks were charging enormous premiums for short-term financing; the difference between the cost of a three-month loan from a bank, and a three-month loan from the government, rose to the widest point since at least 1984. Other lending rates stayed high.

On Wall Street, the drops were sharp and swift, catching many investors and stock strategists on Wall Street by surprise. Many had expected the measure to be passed in the House, and lawmakers in Congress had suggested as much in comments earlier on Monday.

Instead, traders turned to their television screens to see the votes opposed to the bill adding up, and eventually surpassing those in favor. The banal image broadcast on several television networks ? a no-frills table of ??yea?? and ??nay?? votes ? contrasted with the expressions of increasing concern on the faces of workers on the floor of the New York Stock Exchange.

?The bottom line is that everybody seems confused,? Ryan Detrick, a strategist at Schaeffer?s Investment Research, said just moments after the initial plunge. ?When that happens, you get selling, you get panicky, you get selling.?

The sell-off reinforced the fear coursing through Wall Street as investors wondered, first, whether the bailout plan would pass Congress, and second, what would happen if it did not.

Earlier on Monday, in response to the strain, the Federal Reserve moved to 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.

Shares had fallen earlier in the day after Citigroup snatched up the core business of Wachovia, the ailing banking giant, which had been in danger of collapse.

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, seemed to only underscore the troubling sense among investors that any bank is vulnerable in the current crisis.

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 16 percent and Goldman Sachs was off 13 percent.

European stocks closed before the bailout bill was rejected in the House. But they had already fallen sharply: 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.

Vikas Bajaj, Keith Bradsher and Matthew Saltmarsh contributed reporting.

Bad news for expats relying on the Market for their income.

To be honest, I'm scared sh-tless about my job security. I recently changed job from a failed wall street firm to a pretty conservative industry. Now that wall street disaster may start to have broad effect on main street, my plan to go back to Thailand might come sooner than expected. I don't know, if passed, the $700 Billion bailout would really rescue the economy.. but from what happened today, I hope the Bill will eventually pass Congress.

Asian markets will open in a few hours. Guess we will know how bad it will be...

The bill will eventually pass if the legislators get out of bi-partisan roles, but we haven't seen the last of the bank failures - there were 4 yesterday!

Great! I don't need to visit the Financial Times website today!!

Funny how 2008 looks so different from 2006. Back then we owned ALL of AIG, BAC, C, CMA, GS, JPM, LEH, WB, WFC, and WM. Then I went to visit a small Santa Monica-based thrift in January 2007, and the IR guy was very forthcoming about how awful was their book of option ARMs, which got me to thinking and scared the crap out of me ... so we sold them all except for JPM and WFC and picked up PNC, USB and TROW (we have to hold SOMETHING, can't just short the sector or go into cash). While it has not been a cake walk, we are in the game of relative performance where the object is to beat Mr. Index. Of course you just can't escape those mortgages: At our little company retreat, I told my partners Thursday just before lunch, "Being defensive has been great for us, but if this bailout goes forward we are going to need to change gears again, hold our noses and buy back all the lousy lenders who have written off a ton of assets." BE C A R E F U L WHAT YOU WISH FOR! Driving back from the Montage at Laguna Beach that VERY same Thursday afternoon, we found out JPM bought WM and was going to flog $10B of stock on Friday... fortunately the market has taken the takeover well... for now...