Bailout Defeated, Blame Flies, Wall Street Tanks

The fate of the $700 billion financial bailout bill is in limbo, following today’s surprising and dramatic defeat of the delicately negotiated plan in the House, by a 228-205 vote. With the Dow Jones Industrial Average plummeting (it declined by more than 700 points), President Bush and congressional leaders vowed to bring the package back for another vote as soon as possible — probably later this week — but it was far from clear what they could do to make it any more palatable.

The main reason for the defeat was opposition from House Republicans, two-thirds of whom voted against the bill, despite the fact that it was conceived by the Bush Administration and supported by their presidential nominee, John McCain, who had suspended his campaign last week to return to Washington and work on the package. By comparison, 140 Democrats, some 60% of the caucus, voted for it.

Supporting the bill wasn’t easy for lawmakers on either side of the aisle. As the deal was being worked out last week, congressional offices were reporting that constituent phone calls were running 100 to 1 against the measure, which was seen across the country as a bailout of the very Wall Street executives whose misjudgment in making and selling bad real estate investments had spawned a credit crisis that threatens to drag down the entire financial system.

But supporters of the plan — which had been crafted by Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke — argued that as painful as it would be to commit such an unprecedented amount of taxpayer money to cleaning up Wall Street’s mess, the price of not doing it would be even greater, because the crisis would spread to hurt ordinary businesses and their workers. Supporters of the plan argued that the only way to keep the financial system operating was to have the government buy the junk assets in order to take them off the balance sheets of the banks that now hold them. Congressional leaders of both parties also negotiated changes to the plan that were aimed at making it more politically salable, including limits on executive compensation for the Wall Street firms that take advantage of it and stricter oversight of the program.

Not surprisingly, given the market’s quick negative response and the general atmosphere that pervades Washington, both sides were quick to point fingers. House Republicans charged to the microphones to blame Speaker Nancy Pelosi for the defeat, saying that at least a dozen of their members switched their votes because they were offended by the partisanship of a speech she gave on the House floor. Democrats scoffed at that excuse. “Think of this: Somebody hurt my feelings, so I am going to punish the country,” said House Banking Committee chairman Barney Frank, a Massachusetts Democrat who had been one of the chief negotiators of the plan.

Meanwhile, the McCain campaign — which had been taking credit for the deal, when it appeared to be headed for passage — put out a statement blaming its failure on Democrats, starting with Barack Obama. “Barack Obama failed to lead, phoned it in, attacked John McCain, and refused to even say if he supported the final bill,” the campaign said in a statement attributed to economic adviser Doug Holtz-Eakin.

Both houses of Congress had been scheduled to adjourn this week until after the election. The defeat of the bailout plan means that everyone is likely to be back at work later this week. The question is what the markets will do in the meantime.

(See the winners and losers of the Wall Street mess here.)

(See the ten steps to the financial meltdown here and TIME’s photos of the global financial crisis here.)

(See TIME’s Pictures of the Week here.)