Wall Street's worst fears came to pass Monday, when the government's financial rescue plan failed in Congress and stocks plunged precipitously – hurtling the Dow Jones industrials down nearly 7 percent. The almost 780-point decline was the largest one-day point drop ever for the index.
The percentage declines for the Standard & Poor's 500 and Nasdaq composite indexes were even larger. And credit markets, whose turmoil helped feed the stock market's angst, froze up further amid the growing belief that the country is headed into a spreading credit and economic crisis.
Stunned traders on the floor of the New York Stock Exchange, their faces tense and mouths agape, watched on TV screens as the House voted down in midafternoon the administration's $700 billion plan to buy up distressed mortgage securities. Activity on the floor became frenetic as the “sell” orders blew in.
The Dow told the story of the market's despair. The blue-chip index dropped by hundreds of points in a matter of moments. By the end of the day it had passed by far its previous record for a one-day drop, 684.81, set in the first trading day after the Sept. 11, 2001, attacks.
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The selling was so intense that just 162 stocks rose on the NYSE – and 3,073 dropped.
It takes an incredible amount of fear to set off such an intense reaction on Wall Street, and the worry now is that with the rescue plan's fate uncertain, no one knows how the financial sector, hobbled by hundreds of billions of dollars in bad mortgage bets, will recover.
While investors didn't believe the plan was a panacea, and understood it would take months for its effects to be felt, most market watchers believed it was a start toward setting the economy right after a credit crisis that began more than a year ago and that has spread overseas.
“Clearly something needs to be done, and the market dropping 400 points in 10 minutes is telling you that,” said Chris Johnson, president of Johnson Research Group. “This isn't a market for the timid.”
The news of Wachovia's buyout raised another question on Wall Street: Which banks are next, and how many? The Federal Deposit Insurance Corp. has a list of over 110 banks that were in trouble in the second quarter, and that number surely has grown in the third.