You can find more stories like this in our On the Brink series.
The political tides in Washington over the past week have been as turbulent as the
Dow Jones Industrial Average
, which plummeted a record 777 points Monday as hopes of a government rescue for ailing banks suffered a stunning defeat on Capitol Hill.
And with the future of the plan to provide the federal government $700 billion to buy up banks' troubled assets in limbo after it was voted down 228-205 in the
Monday, expect the bumpy ride to continue for the foreseeable future.
The House vote has been halted while leaders who shepherded the bill attempt to sway about a dozen of their nay-saying counterparts to switch sides. A Senate vote is scheduled for Wednesday but it is unclear how things will proceed until a House resolution -- which may involve some legislative tweaking -- is reached.
"Think about the big run-ups and sharp declines over the past 10 days as this story has unfolded," says Michael Branham, a financial planner at Cornerstone Wealth Advisors. "There really have not been any fundamental shifts in the status of the economy or underlying companies and their profits, based on any given news cycle. Instead investors are buying and selling on hope, or lack thereof."
The plan voted down in the House on Monday was the product of several compromises between Congress and the Bush administration, which first proposed it Sept. 18 after the bankruptcy of
and the federal government's bailouts of
American International Group
( FNM) and
Lawmakers structured a bill that would provide up to $700 billion in installments -- $250 billion initially and another $100 billion if the president deems it necessary, with another $350 billion available with Congressional approval. The measure included additional protections for taxpayers, as well as restrictions on executive compensation for firms that participate in the program.
Lawmakers are hamstrung by two unpalatable options in a crucial election year: Approve an unpopular and costly bill or risk a swift deterioration in the U.S. markets and economy that could hurt consumers even more. Partisan bickering has bogged down the process, with conservative House Republicans teaming up against an unlikely coalition of Democrats and the Bush administration.
Several Republicans blamed House Speaker Nancy Pelosi's (D., Calif.) speech ahead of the vote, during which she blamed the Bush administration's economic policies for the current crisis and, unsurprisingly, painted Democrats as the heroes. House leaders -- including John Boehner (R., Ohio), Adam Putnam (R., Fla.), Roy Blunt (R., Mo.) and Eric Cantor (R., Va.) -- responded by criticizing her speech after the bill failed to pass muster, saying Pelosi had undermined their efforts for a bipartisan solution.
Steve Diamond, a corporate finance law professor at Santa Clara University, says there is plenty of blame to go around for the current crisis on both sides of the aisle. But because legislators did a poor job of explaining the plan and its benefits to the public, it has been even harder to garner support. Furthermore, says Diamond, those who allow political wrangling to delay action may not recognize the scope of the problems.
"How they screwed up the vote this morning, I don't know," says Diamond. He adds that the proposal "was not framed very effectively" by calling it a "bailout."
"It looks like they're rescuing players on the Street at the expense of the broader public," he says. "My view of the intervention was that it was not a bailout but playing the role of market maker for these illiquid securities."
, who formulated the original proposal to purchase banks' toxic assets with public funds, said he and other administration officials would continue to work with Congressional leaders to hammer out an acceptable plan. He noted the collapse of
, which was acquired by
last week, and
said it would buy on Monday, as well as two European institutions.
"Markets around the world are under stress," an anxious and frustrated looking Paulson said Monday afternoon. The former
CEO promised that the Treasury and
would "use all the tools available to protect our financial system and our economy," but added that "our tool kit is substantial but insufficient."
Andy Bischel, CEO and chief investment officer of SKBA Capital Management and manager of the AHA Socially Responsible Equity Fund, notes that the Fed may expand its auction facility, cut rates or lower reserve requirements until a more permanent solution is reached. He notes that the market's decline may be exacerbated by quarter-end liquidation and repositioning of certain mutual funds at the end of their fiscal year.
Still, "there's a wholesale panic going on right now," says Bischel. "The financial consequence of doing nothing is clear, so even a bad bill would be better than no bill."
, chief investment strategist at Blue Marble Research, said on his blog that another alternative would be for the Financial Accounting Standards Board to halt mark-to-market accounting rules.
"As for the odds of that happening, the answer is simply 'who knows?'" writes Cataldo. "However, the consequences of no action by either the House or FASB are frankly unthinkable."