Markets bloodied as bank bailout package fails

Widespread panic spread through North American stock markets Monday as a historic $700-billion (U.S.) bank bailout package went down to defeat.

Toronto stocks [TSX-I] fell 840.93 points, or 6.93 per cent, to 11,285.07, marking the biggest daily point drop and a loss of more than $100-billion (Canadian) in market value.

The Dow Jones industrial average [DJIA-I] also saw its biggest one-day point drop in history, sinking 777.68 points or 6.98 per cent to 10,365.45. The S&P 500 [SPX-I] fell 106.59 points or 8.79 per cent to 1,106.42 for a loss of almost $1-trillion (U.S.) in value.

The dollar was also sideswiped, falling 1.03 cents to 95.79 U.S. cents U.S.

Credit markets, whose turmoil helped feed the stock market’s angst, froze up further amid the growing belief that the United States is headed into a spreading credit and economic crisis. Now, investors will have to wait until Thursday for further clarity, as the U.S. House of Representatives intends to reconvene for an emergency meeting, rather than break for the year as planned.

“The plan was a big black box with no guarantees of success,” said Louis Gagnon, a professor of finance at Queen’s University in Kingston, Ont. “But the fact that nothing is now being down just gives more substance to the notion that nobody knows what is going to happen. They have to do something else, but whatever plan they come up with will be difficult to implement, because there are no guarantees – these are just notions, they are ideas.”

Financial adviser Ted Rechtshaffen was on the phone trying to reassure clients Monday afternoon when the stock market took its sudden, unnerving plunge of several hundred points.

“The phone’s been quiet today, to be honest,” said Mr. Rechtshaffen, president of TriDelta Financial Partners in Toronto. “But that doesn’t mean clients aren’t worried. Our job is to try and call them and make sure they’re doing OK.”

Before today, September was easily living up to its reputation as the worst month on average for the stock markets. But the failure of the bailout plan for the U.S. banking system plus a plunge in commodity prices turned another dismal day into an out-and-out rout.

The bailout plan, which appeared set for approval when a compromise was announced Sunday, was intended to increase liquidity in the markets and restore confidence in a shattered banking sector. The plan was rejected 228-to-205 in the U.S. vote.

Treasury spokeswoman Michele Davis told reporters that Secretary Henry Paulson would now “be consulting with the president, the chairman of the Federal Reserve, and congressional leaders on next steps” in a bid to rework the deal or come up with another package.

“In the meantime, we stand ready to work with fellow regulators and use all the tools at our disposal, as we have over the last several months, to protect our financial markets and our economy.”

Critics said the bailout didn’t address the concerns of the average citizen, such as job losses and the weak housing market that is at the source of the banking problems. If Monday’s vote had passed, the plan would have been before the Senate Wednesday and signed by the President George W. Bush soon after.

“The immediate downside market reaction is appropriate for the decision made by the House of Representatives today,” said Sheryl Purdy, vice-president of Leede Financial Markets in Calgary. “They called the dare and now they’re seeing what the free markets think of their decision to vote down this bill. I sincerely hope they will revise and reconsider their decision made today”

As lawmakers voted, the yield of the 3-month Treasury bill sank to 0.32 per cent – indicating their willingness to sacrifice returns for security. Gold was also seen as a safe haven, with gold futures for December rising $5.90 to $894.40 an ounce on the New York Mercantile Exchange.

“This bailout was a ray of hope, and now that has been set aside,” said Robert McWhirter, president of Selective Asset Management Inc. “I really don’t think the politicians have any sort of perspective as to what this all involves.”

Oil contributed to the deep losses in Toronto, with the energy sector down 9 per cent. Oil lost as much as $10.01 Monday to $96.88 a barrel, but had regained some of the losses to settled at $98.22. It dragged the oil sector 10 per cent lower on the TSX, with Canadian Natural Resources down 18 per cent and EnCana Corp. off 8.7 per cent.

“Oil is really down on all of the broader worries,” said Martin King, energy commodities analyst at FirstEnergy Capital Corp. in Calgary. “They’re worried about demand and about this financial package in the United States. There is also general blowback – people need to raise cash again so they are selling their oil positions.”

David Cockfield, a portfolio manager at Leon Frazer Associates in Toronto, said “illogical” investors are abandoning sectors that are in relatively good shape in a bid to protect their assets. Oil may be falling, he said, but it’s still 25 per cent higher than it was last year and profits are expected to by 50 per cent higher at oil producers this quarter than the same period a year ago.

“It’s all somebody else’s problems, being reflected in Canadian stocks,” Mr. Cockfield said. “All of our concerns are in Canada are so far imagined. We think this could hurt us, but we’ve seen very little evidence of that so far. People are just running for cover with the assumption that all those problems are going to cross over the border and there’s no proof that this is happening.”

Earlier in the day, the credit crisis continued to claim victims. The Federal Deposit Insurance Corp. said Citigroup Inc. would take over Wachovia’s banking operations. Citigroup will absorb up to $42-billion (U.S.) in losses, with the government backing any further losses. In return, Citigroup will issue FDIC $12-billion in preferred shares and warrants.

Wachovia is the latest institution to succumb to the crisis – mortgage lenders Freddie Mac and Fannie Mae were taken over by the government to protect $5-trillion in mortgages, insurer American International Group was bailed out by the governments in an $85-billion effort, Lehman Brothers Holdings declared bankruptcy and Merrill Lynch was absorbed by the Bank of America.

The banking crisis also cut deeply into Europe over the weekend, with Fortis and Bradford & Bingley banks receiving government bailouts and other European banks getting hammered in the markets on Monday.

By: Steve Ladurantaye, with files from reporter Kevin Carmichael and Rob Carrick

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