Stocks plunge as House rejects bailout package

Dow absorbs biggest one-day loss in history: 777.68 points

By Andrea K. Walker and Lorraine Mirabella

September 30, 2008

New York Stock Exchange trader David O'Day takes in the record drop, which included a 500-point freefall within minutes of the House vote. (AP photo / September 29, 2008)

Stocks plunged yesterday with the Dow Jones industrial average falling nearly 780 points - the biggest one-day point drop ever - after federal lawmakers failed to pass a $700 billion plan to bail out the financial system.

The vote by the House of Representatives rejecting the bill created a frenzied sell-off by jittery investors who worried this rescue package to help bolster the economy was slipping away. Fears of a continued credit crunch on Wall Street and more turmoil pushed investors to sell feverishly.

Financial markets began to erode before the vote, and by the end of the day, the Dow set a record for a one-day point drop, falling 777.68 to 10,365.45. It fell 684.81 on the first trading day after the Sept. 11, 2001, terrorist attacks. Investors sold rapidly yesterday in the final trading hours after lawmakers voted against the bailout package.

Other indicators also fell. The Nasdaq dropped 199.61, or 9.14 percent, to 1,983.73, the eighth largest point decline and the third biggest percentage fall in its history. The Standard & Poor's 500 index declined 106.59, or 8.79 percent, to 1,106.42. It was the S&P's largest-ever point drop and its biggest percentage loss since the week after the October 1987 crash.

The Dow's 7 percent decline was the 17th biggest percentage drop in its history, well below the more than 20 percent drops seen in October 1987 and the Great Depression.

"We're in for a rough few days," said Kevin McIntyre, an associate professor of economics and business at McDaniel College in Westminster. "Given how strongly the market is reacting, it's clear the market expected a deal to be struck today."

Rejection of the bill came just hours after yet another distressed bank, Wachovia Corp., said it was selling its banking operations to Citigroup Inc. with help from the federal government.

Wachovia was the latest financial institution to fall in the mortgage crisis. Merrill Lynch & Co. was sold to Bank of America, while Washington Mutual Inc., Lehman Brothers Holdings Inc. and Bear Stearns have also become victim to soured mortgage investments.

Maryland-based companies also suffered amid the broad market sell-off. Provident Bankshares Corp. stock lost 20.2 percent of its value, or $2.22, to close at $8.77. Baltimore asset managers Legg Mason Inc. and T. Rowe Price Group saw double-digit drops in their shares. Legg lost $7.75, or 17.26 percent, to close at $37.14. Price fell $10.93, or 17.94 percent, to $50.

Shares of Constellation Energy Group, which said that its sale to Warren Buffett's MidAmerican Energy Holdings is on track, lost $2.25, or 8.9 percent, to $23. Constellation this month agreed to sell itself for $26.50 a share amid the market turmoil.

"Without passage of this bill, people are basically sellers," said Douglas Schmidt, an investment banker and CEO of Chessiecap Securities in Bethesda. "They think there's uncertainty in the future and they'd rather be in something other than a stock."

The continued bad news created more uncertainty among investors who lit up phone lines at the offices of local financial investors and brokers.

"People have been a little bit on edge, not so bad yet, I've found," said John Bacci, president of Foundation Financial Advisors in Linthicum. "I don't think people have fully digested this one. The first tendency people have when they're nervous is to sell and get back in when things improve, and that's generally a mistake. The re-entry point is so difficult. If and when this thing comes back, it will likely be very quick."

Clients are "appropriately anxious," but not panicked, said Stuart Ritter, a certified financial planner with T. Rowe Price in Baltimore. "People are calling more for reassurance at this point."

In many cases, clients should stick to their long-term plans, planners said.

"When things happen in the market, it's uncomfortable," Ritter said. "If you have a short time horizon, you shouldn't be in the market. If you have a longer time horizon, it's not about what the market did today, it's where it's going to be in 10 or 20 years. There's nothing you can do about the decline that's already occurred, so making changes doesn't take away what's already happened, but it does take away whatever increase might happen in the future."

Investors at Baltimore-Washington Financial Advisors Inc. didn't get calls yesterday, but said they've been hearing from worried investors for weeks now.

"We've been telling them that this is going to be a market recovery that is going to occur very slowly over a long period of time with many fits and starts," said Saxon Birdsong, CEO and chief investment officer at Baltimore-Washington Financial Advisors. "We will not wake up in the near term and find out everything is okay. It's just going to take time to work through the problems."

Bacci said that especially vulnerable investors include retirees drawing incomes on a monthly basis and people with unreasonably high levels of debt.

"Every retiree drawing out a monthly income should consider the painful step of reducing monthly draw," he said, while those with high debt levels should try to reduce those figures. "Pulling out of the market is not ill-advised for everyone. If someone has too high a risk profile or is living with too much leverage, those people should be panicked and hopefully propelled into some action."

The repercussions haven't yet become evident, he warned. Consumers could find it tougher to get a car loan or mortgage.

Meanwhile Congress is expected to take another shot at passing a bailout package, though a timetable remains unclear.

Birdsong said they have no choice but to pass the legislation and that the markets will eventually force them to do so.

"Congress has got to get the right solution," he said. "It's the only answer. The private sector is not going to solve the problem."

Baltimore Sun reporters Jay Hancock, Lorraine Mirabella and Hanah Cho, and the Associated Press contributed to this article.