WASHINGTON — The House's shocking rejection of legislation designed to steady financial markets left policymakers bewildered and the fate of the bailout in doubt.
House and Senate leaders had been confident they could cut a deal and get the measure approved this week. Instead, rank-and-file members of both parties voted no, leading to a 228 to 205 defeat.
Policymakers had no Plan B, but observers outlined possible scenarios: Lawmakers could bring the same bill back this week, hoping that the Dow Jones industrial average's 777-point plunge would persuade skeptics to change their vote; they could also make tweaks to the bill in the hope of winning more support.
But lawmakers may have to head back to the drawing board or concede that no plan can pass.
"I don't know that we know the path of the way forward at this point," House Minority Leader John Boehner, R-Ohio, said in a press conference.
House Financial Services Committee Chairman Barney Frank, who helped craft the deal, told reporters he would be in touch with Treasury Secretary Henry Paulson to see how best to move forward. The House has adjourned for Rosh Hashanah and will regroup Thursday, he said.
"We'll have to see" what to do next, the Massachusetts Democrat said.
Acknowledging the House conservatives who opposed using taxpayer dollars to buy up troubled assets, Rep. Frank said the Bush administration would have to see how far that opposition goes.
"I think the administration has to do a check … as to what extent there is a fundamental, philosophical, ideological opposition to any intervention, and until we know that, it's hard to shape the new plan," he said.
Rep. Frank said he would be watching market reaction.
"Short-term thing is one thing. But I think the reaction will not be just in the stock market," he said. "The reaction will also be in the credit markets. … If Paulson is right, if [Federal Reserve Board Chairman Ben] Bernanke is right, then I think there will be some reaction."
Mr. Paulson may have boxed himself in. For the past week he has vigorously argued that the bill is necessary to stave off catastrophe in the financial markets. After the bill failed, he tried to reassure Wall Street that he would do everything in his power to prevent further deterioration, but he acknowledged his power was limited.
"I am committed to continue to work with my fellow regulators to use all the tools available to protect our financial system and our economy," he said. "Our toolkit is substantial but insufficient."
Sounding just this side of desperate, Mr. Paulson said: "We need to get something done, and I'm going to continue to consult with congressional leaders to find a way forward to get something done as soon as possible. We need to get something done. … We need to put something back together that works."
The House loss followed dozens of hours of tense negotiations over the last week between Mr. Paulson and congressional leaders that concluded with a bipartisan compromise.
The Senate had been expected to take up the measure Wednesday. It was unclear if that would still happen.
Observers said the bill's language would likely be changed to placate more members.
"We have to deconstruct this bill and put it back together in a manner that appeals to more members of Congress and still solves the liquidity crisis," said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable.
Some analysts said resurrecting the bill would be difficult after members return to their districts and hear from angry constituents.
"They are going to have to bring it up again," said Andrew Parmentier, an analyst at Friedman, Billings, Ramsey Group Inc.'s FBR Capital Markets Corp. "They are going to have to find some way to do it. I just think the odds of this passing after members return home, that's tough. They are going to hear from a lot of constituents when they return home."
Others agreed with that assessment.
"It was a much better strategy to have them vote on this before they return home. … I don't think we can stress enough the importance of passing something this week," said Ron Glancz, a lawyer at Venable LLP.
But it remained possible that the fallout on Wall Street could sway members. The Dow average's drop followed the news that the House had rejected the bill. Since some lawmakers openly doubted the market would worsen if no bill were passed, the drop may change their minds, some observers said.
James Chessen, the chief economist for the American Bankers Association, said the stock market lost more in market capitalization Monday than the bill would have authorized the Treasury Department to spend. At one point after the failed vote, the market had lost $945 billion of capitalization, according to some indexes.
"In other words, the stock market lost more than $900 billion in market value today because Congress failed to pass authority for Treasury to buy assets worth $700 billion," Mr. Chessen said. "That's not necessarily $700 billion in losses, but we lost $900 billion today."
With the way forward unclear, lawmakers turned to blaming each other for the House loss.
Some analysts said policymakers did not do a good job selling the plan, leading the public to oppose it en masse.
"Everybody's called it a bailout, and once it got labeled a bailout, it was going to have an uphill battle," said Brian Gardner, an analyst with KBW Inc. "It definitely had an impact on the debate and how people viewed it. It was never sold as stabilizing the macroeconmoy. It was never sold about what it meant to business and consumer access to credit. So it became a bailout for Wall Street."
It was also a bad time to try to pass a plan that was unpopular, analysts said. "It doesn't look very good when you go home," said Gil Schwartz, a partner at Schwartz & Ballen LLP.