Warren Buffet - S&P made a mistake !

Billionaire Warren Buffett said Standard & Poor’s (S&P) erred when it lowered the US credit rating and reiterated his view that the economy will avoid its second recession in three years.

The US, which was cut August 5 to AA+ from AAA at S&P, merits a “quadruple A” rating, Buffett, 80, said yesterday in an interview with Betty Liu at Bloomberg Television. The downgrade followed the biggest weekly selloff in US stocks in 32 months, with the S&P 500 slumping 7.2 per cent to its lowest level since November.

“Financial markets create their own dynamics, but I don’t think we’re facing a double dip recession,” said Buffett, chairman and chief executive officer of Omaha, Nebraska-based Berkshire Hathaway Inc. “Clearly what stock markets do have is an effect on confidence, and this selloff can create a lack of confidence.”

Stocks plunged last week amid signs the US economy is slowing and speculation that Europe will fail to contain its sovereign-debt crisis. Reports on manufacturing and consumer spending trailed economists’ forecasts. Euro region central bank governors are planning emergency talks aimed at limiting the market fallout from the first US rating downgrade in history.

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Asian markets open down

Tokyo's Nikkei stock market opened down 1.4 percent and then made slight gains, but Japan's finance minister reportedly said the country has not lost faith in the dollar or U.S. Treasury bonds even after the U.S. credit rating was downgraded for the first time in history.

The news in other Asian markets was not so promising. Australia's S&P/ASX-200 index lost almost 2 percent in early trading and indexes in New Zealand fell more than 3 percent.

The mixed reports likely won't do much to quell growing concerns that Standard & Poor's downgrade of the U.S. credit rating from AAA to AA+ could rock global financial markets.

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US at risk of recession - Goldman Sachs

Goldman Sachs, in a bearish forecast, expects 2 percent growth in the U.S. for the next few quarters and a "significant risk, one in three, that we will go back into recession," senior economist Jan Hatzius told CNBC Friday.

"We have seen enough over the last two months to come to the conclusion that in the first half the underlying pace of growth was pretty disappointing, even if you adjust for [the disruptions in] Japan and adjust for fiscal policy," he said.

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US Crisis - all that you need to know

Rumors were swirling all day, and then it finally hit: Standard & Poor's downgraded the nation's credit rating Friday evening, the first time the U.S. Treasury has lost its pristine AAA rating since ratings began nearly a century ago.

S&P now rates the United States at AA+. The rating agency didn't beat around the bush when describing why it made the cuts:

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World might dump dollar - China's top rating agency

The man who leads one of China’s top rating agencies says the greenback’s status as the world’s reserve currency is set to wane as the world’s most powerful policy makers convene to examine the implication of S&P’s decision to strip the United States of its triple “A” rating.

In comments emailed to CNBC, Guan Jianzhong, chairman of Dagong Global Credit Rating, said the currency is “gradually discarded by the world,” and the “process will be irreversible.”

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The amazing story of US Downgrade

On Friday night, when news broke that S&P had made a $2 trillion error in its analysis of the US debt situation, we kind of didn't believe it.

Basically we figured there might have been some issue, but that mostly the Treasury was trying to throw up a smokescreen to distract from the bad news.

But this WSJ tick-tock on the interactions between the ratings agency and Treasury over the last week really is kind of unbelievable.

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Investors could diversify out of US bonds

Foreign exchange markets are bracing for heightened volatility on Monday morning as the reaction to Standard and Poor's lowering of US long-term sovereign credit rating to AA+ from AAA sets in.

It is obvious that global investors would consider diversifying their assets out of US treasuries. This move can apply pressure on the dollar. There is also fear that some funds which are not allowed to hold any asset without AAA rating might be forced to sell treasuries in the near term.

However, it is hard to envisage a total collapse of the greenback as no investor can claim that he was unaware of the state of the US economy or the risks associated with investing in dollar-denominated assets.

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Reason why US rating was downgraded

What is a downgrade?

Standard & Poor's, one of the three major credit rating agencies that assign scores to debt issued by institutions, municipalities, and governments, said there is a heightened degree of risk in holding debt issued by the United States. So it lowered its rating from the AAA, the highest possible level, by one notch to AA+. It also said the outlook is negative.

Why did it lower the rating?

The credit rating agency believes the outstanding debt of $14.3 trillion and projected deficits for coming years in the United States no longer warrant the top-tier rating that it had assigned to the United States since 1941. It also said that the political environment does not build confidence that the United States can agree on how to lower the deficit in a meaningful way any time soon.

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US Crisis to hamper growth

The downgrading of US sovereign rating will negatively impact exports and moderate capital flows into the country but overall economic growth will remain robust at 8.2%, said Prime Minister’s economic advisory council chairman (PMEAC) C. Rangarajan.

“More than the downgrade what will be the impact for India and the rest of the world will be the slow pace of recovery of the US. It will have implication for trade flow and capital flow,” Rangarajan told PTI.

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Middle East markets crash

Stocks tumbled across the Middle East on Sunday as most regional markets opened for their first day of business following a historic downgrade of the United States' credit rating.

Mideast markets mostly operate Sunday to Thursday. That makes them the first to react to credit rating agency Standard & Poor's decision late Friday to cut the U.S. level one notch to AA+ from its top AAA rating. The only exception is OPEC powerhouse Saudi Arabia, which plunged 5.5 percent when it opened Saturday.


The Dubai Financial Market's benchmark index suffered some of the steepest declines, plunging more than 5 percent in early trading before trimming its losses. The index was down 3.8 percent to 1,482 points by early afternoon.

While the S&P downgrade weighed on the market, it was also dragged lower by a lower than expected quarterly profit from Arabtec Holding, the Emirati construction giant that helped build the world's tallest tower in Dubai. Arabtec shares fell 4.9 percent to trade at 1.4 dirhams (38 cents).


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World markets in turmoil on growth jitters

Equity markets across the globe went into a tailspin, as panicky investors scurried for cover amid fears that the US economy was slowing down and the eurozone credit crisis will deteriorate. The selloff across world markets came despite the US Congress clearing a crucial legislation to lift the debt ceiling before the Aug. 2 deadline. The undertone was hit by a series of downbeat economic reports pointing to a deceleration in the US economy. Also, Moody's and Fitch warned that US' coveted "AAA" rating was still in danger of being downgraded. Economic data from other pockets of the world too showed moderation in economic activity, especially in the manufacturing space.

Tracking the US Bailout

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Via New York Times

Next Meltdown - Credit Card Debt - Size - $950 billion

Rising rates are accelerating credit-card defaults and soured debt could further undermine the financial system

The troubles sound familiar. Borrowers falling behind on their payments. Defaults rising. Huge swaths of loans souring. Investors getting burned. But forget the now-familiar tales of mortgages gone bad. The next horror for beaten-down financial firms is the $950 billion worth of outstanding credit-card debt—much of it toxic.

That's bad news for players like JPMorgan Chase (JPM) and Bank of America (BAC) that have largely sidestepped—and even benefited from—the mortgage mess but have major credit-card operations. They're hardly alone. The consumer debt bomb is already beginning to spray shrapnel throughout the financial markets, further weakening the U.S. economy. "The next meltdown will be in credit cards," says Gregory Larkin, senior analyst at research firm Innovest Strategic Value Advisors. Adds William Black, senior vice-president of Moody's Investors Service's structured finance team: "We still haven't hit the post-recessionary peaks [in credit-card losses], so things will get worse before they get better." What's more, the U.S. Treasury Dept.'s $700 billion mortgage bailout won't be a lifeline for credit-card issuers.

The big firms say they're prepared for the storm. Early last year JPMorgan started reaching out to troubled borrowers, setting up payment programs and making other adjustments to accounts. "We have seen higher credit-card losses," acknowledges JPMorgan spokeswoman Tanya M. Madison. "We are concerned about [it] but believe we are taking the right steps to help our customers and manage our risk."

But some banks and credit-card companies may be exacerbating their problems. To boost profits and get ahead of coming regulation, they're hiking interest rates. But that's making it harder for consumers to keep up. That'll only make tomorrow's pain worse. Innovest estimates that credit-card issuers will take a $41 billion hit from rotten debt this year and a $96 billion blow in 2009.

Those losses, in turn, will wend their way through the $365 billion market for securities backed by credit-card debt. As with mortgages, banks bundle groups of so-called credit-card receivables, essentially consumers' outstanding balances, and sell them to big investors such as hedge funds and pension funds. Big issuers offload roughly 70% of their credit-card debt.

But it's getting harder for banks to find buyers for that debt. Interest rates have been rising on credit-card securities, a sign that investor appetite is waning. To help entice buyers, credit-card companies are having to put up more money as collateral, a guarantee in case something goes wrong with the securities. Mortgage lenders, in sharp contrast, typically aren't asked to do this—at least not yet. With consumers so shaky, now isn't a good time to put more skin in the game. "Costs will go up for issuers," warns Dennis Moroney of the consultancy Tower Group.

Sure, the credit-card market is just a fraction of the $11.9 trillion mortgage market. But sometimes the losses can be more painful. That's because most credit-card debt is unsecured, meaning consumers don't have to make down payments when opening up their accounts. If they stop making monthly payments and the account goes bad, there are no underlying assets for credit-card companies to recoup. With mortgages, in contrast, some banks are protected both by down payments and by the ability to recover at least some of the money by selling the property.

THE BIG BOYS' BURDEN

Making matters worse, the subprime threat is also greater in credit-card land. Risky borrowers with low credit scores account for roughly 30% of outstanding credit-card debt, compared with 11% of mortgage debt. More than 45% of Washington Mutual's credit-card portfolio is subprime, according to Innovest. That could become a headache for JPMorgan Chase, which agreed on Sept. 25 to buy the troubled thrift's credit-card business and other assets for $1.9 billion. Says a JPMorgan spokeswoman


via Businessweek

Apocalypse Now - DOW plunges below 9000

Stocks plunged Thursday, sending the Dow Jones industrial average down 679 points -- more than 7 percent -- to its lowest level in five years. Stocks took a nosedive after a major credit-rating agency said it might cut its rating on General Motors and Ford, further rattling investors already fretting over the impact of tight credit on the economy.

The Standard & Poor's 500 index also fell more than 7 percent.

The declines came on the one-year anniversary of the closing highs of the Dow and the S&P. The Dow has lost 5,585 points, or 39.4 percent, since closing at 14,164.53 on Oct. 9, 2007. It's the worst run for the Dow since the nearly two-year bear market that ended in December 1974 when the Dow lost 45 percent. The S&P 500, meanwhile, is off 655 points, or 41.9 percent, since recording its high of 1,565.15.

U.S. stock market paper losses totaled $872 billion Thursday and the value of shares over all has tumbled a stunning $8.33 trillion since last year's high. That's based on figures measured by the Dow Jones Wilshire 5000 Composite Index, which tracks 5,000 U.S.-based companies' stocks and represents almost all stocks traded in America.

Thursday's sell-off came as Standard & Poor's Ratings Services put General Motors Corp. and its finance affiliate GMAC LLC under review to see if its rating should be cut. The action means there is a 50 percent chance that S&P will lower GM's and GMAC's ratings in the next three months. GM has been struggling with weak car sales in North America.

S&P also put Ford Motor Co. on credit watch negative. The ratings agency said that GM and Ford have adequate liquidity now, but that could change in 2009.

via AP

British govt with a rescue act!

The British government on Wednesday announced a 50 billion pounds emergency rescue plan to partly nationalise major banks, a day after the stock prices plunged raising investors fear about their survivability in the global financial meltdown.

Assuring that the move would help stabilise eight major British banks, the Prime Minister Gordon Brown billed it as a "radical" plan to restore public "confidence and trust" in the financial system.

Under the move unveiled half an hour before the markets opened today, the treasury said it would be investing upto 50 billion pounds in exchange for preference shares in eight of the country's largest banks and building societies: Abbey National PLC, Barclay's PLC, HSBC, HBOS, Lloyds TSB Bank, Royal Bank of Scotland, Nationwide building society and Standard and Chartered Bank.

Prime Minister Gordon Brown told newsmen at 10, Downing Street: "Extraordinary times call for the bold and far-reaching solutions."

"Our stability and restructuring programme is comprehensive, it is specific and it breaks new ground. This is not a time for conventional thinking or outdated dogma but for the fresh and innovative intervention that gets to the heart of the problem," he said.

Chancellor of Exchequer Alistair Darling said the scheme would see taxpayers' money used to buy stakes in major banks in an attempt to halt the meltdown in the financial sector.

And the Government said it stood ready to make at least another 25 billion pounds available for other eligible institutions.

The rescue plan came a day after the British banks stock prices plunged on investor fears that they wont be able to get through the global financial meltdown without help.

The Bank of England also announced that it will also make available 200-billion pounds in short term loans and issue 250-billion pounds to guarantee loans between banks.

In return for the public-backed cash injection, the Government is demanding that the banks must cap executive pay and shareholder dividends and commit to supporting lending to home-buyers and small businesses.

The Chancellor made it clear that the government was absolutely not seeking to take control of the banks.

"We are not going to run the banks. They will run as commercial operations, albeit with the government help in its restructuring," he said in a joint news conference with Brown.

Following the government intervention the market welcomed the treasury move and bank share prices began stabilising and recovering in early trading.

Emphasising that the taxpayer interests would be protected, an official statement said: "If the Government is to provide the capital, the issue will carry terms and conditions that appropriately reflect the financial commitment being made by the taxpayer.

The Prime Minister said the recovery plan would be funded through increased borrowing but insisted taxpayers would "earn a proper return".

The rescue plan marks a sharp turn in the fortunes of the British banks, which till now seemed immune to global financial crisis being faced by America's beleaguered financial institutions.

Just three weeks ago Barclays snapped up North American operations of Lehmann Brothers, the collapsed Wall Street giant.

Is India insulated ?

The collapse of the mighty global financial system has triggered a series of chain reactions in India, but the impact is not going to be as widespread as earlier imagined. The reasons are numerous.

First, the subsidiaries of collapsed investment banks like Lehman are being bailed out by entities like Nomura of Japan. This includes the 2,500-strong back office operations in Mumbai, apart from the smaller securities set up. Similarly, American Insurance Group (AIG) in India has a tie-up with the ever reliable Tatas who have given thumbs up to all consumers who were worried about their insurance carried out through this vehicle.

Second, and even more significant, is the fact that the conservative approach to reforms in the financial services sector has ensured that the tremors of earthquakes in the US are being felt minimally in India.

A meeting a few days ago of the regulators for the pension, insurance and other similar sectors concluded with a sigh of relief and pronouncement that slow and steady opening up of the economy has helped in the long run. This is not to say that capital account convertibility - or making the rupee freely tradable - will not take place. But probably as the regulators have pointed out, this can happen when the economy is at a more mature stage.

Ultimately, therefore, the big losers in the global financial crisis in this country are likely to be the iconic software firms like Infosys, Wipro and Tata Consultancy Services (TCS). Much of their business comes from the erstwhile giant investment banks and that could affect their profitability in the short term. In the medium-to-long term, however, these companies are likely to have greater resilience given their innovative approach in the past to hunting out new markets and customers.

The other area where worries still remain is the pullout of funds by foreign institutional investors from the country's equities and debt markets. The bourses have been showing considerable volatility ever since the news came in about the failure of Lehman and the domino-like effect on other investment banks.

While the Indian stock markets became volatile, they have not crashed as might have been expected initially. They now seem to be stabilizing as safety nets are being created for collapsed banks, like converting Goldman Sachs and JP Morgan into commercial banks while other banks are picking up some entities cheap like the takeover of Wachovia by Wells Fargo.

As far as the US and even Europe are concerned, the ramifications appear to be unending as the scenario is unfolding into the biggest banking crisis in 100 years. Financial institutions considered to have a rock-like stability including Merrill Lynch, Morgan Stanley, JP Morgan and the Lehman Brothers collapsed within days of each.

Some were rescued through various manoeuvres and only Lehman actually declared bankruptcy. Reports reaching here also indicate that many smaller banks are declaring insolvency in the US - a development not being taken note of by the international media which is focusing on the big fish. Thus average people in the US are facing severe hardship. No wonder then the battle is being described as one of Main Street vs Wall Street.

The complex set of circumstances that created the crisis are a fascinating story of greed and over-reach at the highest level of the financial system in the US. The solutions being found are even more fascinating - at least in India.

The US administration actually bailed out mortgage giants like Freddie Mac, Fannie Mae and the world's biggest insurance company, AIG. The bailout has resulted in the government taking a majority stake in these institutions including an 80 percent equity share in AIG. In other words, the US is doing what we in India call nationalisation.

The irony has not been lost on those in the banking industry in this country. Former Prime Minister Indira Gandhi was roundly condemned by the US and other Western powers when she nationalised banks in this country in order to ensure that credit reached the poor and powerless. Deemed to be a socialist - or communist-like measure -, it has now been adopted without any qualms by the avowed world leader of free market economies. It seems the US government had little choice, as otherwise widespread mayhem may have resulted for the average citizen both within America and abroad.

In the case of AIG especially, it was recognized that the sudden collapse of the largest insurer in the world would wreak havoc globally. Besides the timing of these events could not have been worse for the Bush administration as the presidential elections are just weeks away. It thus had little option but to carry out damage control as rapidly as possible.

Clearly the rules of the game change for Western economies during crisis. Nationalisation can be resorted to when the American people need to be protected but the same measure can be decried when a developing economy needs to do so to similarly protect its far more impoverished citizenry.

The nationalization of banks in India opened the way for ordinary people to use the financial system for small and tiny deposits. It paved the way for what is known as compulsory priority sector lending. In other words, banks had to provide a certain amount of credit for agriculture and rural areas. In the normal course, commercial banks only lend to sectors providing assured and fairly high returns. But Indian nationalised banks have a social obligation to fulfill and the directive to do so was made possible only by the drastic takeovers effected by Indira Gandhi in 1969.

Apart from banks, many other industries had to be nationalized to prevent millions of workers from becoming jobless. The perennially loss-making National Textile Corp is one such case when the government had to step in as private mill owners were closing shop and leaving their workers in the lurch.

Though the corporation and its regional subsidiaries have rarely made profits, the mills under its charge have also performed a social obligation by producing cheap cloth meant for weaker sections of society. No doubt the nationalization process was carried too far, but at the time it seemed the only way out to save jobs in a country without any social safety nets for the jobless.

So there can be few tears shed in India for the plight of the US economy. Our focus should only be on how to deal with the fallout of the financial disaster that has overtaken the global bastion of free markets.

The bloodletting continues...

The massive rescue plan, designed by the Bush government to cleanse the US financial system and restore confidence in Wall Street, was shot down by the House of Representatives amid continued political wrangling. The move triggered one of the worst selloff in US stocks and dealt a brutal blow to bipartisan efforts to pull the world's largest economy from the brink of collapse, despite repeated warnings of a major catastrophe by White House. The Bush regime, however managed to win the support of the Senate after incorporating a few changes in the bill. The measure was scheduled for a fresh vote in the House on Friday.

In the interim period, there was more mayhem in the western financial space, with the contagion spreading to Europe. Citigroup stepped in to rescue Wachovia, but by the end of the week the troubled bank abandoned that deal and found another suitor in Wells Fargo.

Across the Atlantic, regulators and governments threw lifelines to European banks. The Dutch, Belgian and Luxembourg governments partly nationalised Fortis amid uncertainty about its ability to sell assets it holds in ABN Amro. Dexia, a Belgian-French bank, received a €6.4bn (US$9.2bn) government cash injection. In the UK, Britain Bradford & Bingley, a specialist in buy-to-let mortgages, was nationalised and some assets sold to Spain’s Santander. Hypo Real Estate, Germany’s second-largest property lender, obtained €35bn (US$51bn) in credit guarantees from the government and the banking industry. And Glitnir, Iceland’s third-largest bank, was nationalised.

Ireland’s government took the extraordinary step of guaranteeing all deposits in six Irish banks after their share prices suffered huge losses. The guarantee covers around €400bn (US$575bn) of liabilities, more than twice Ireland’s gross domestic product (GDP). Some politicians, especially in Britain, grumbled that the Irish move may be contrary to European Union (EU) competition law.

The Reserve Bank of India (RBI) stepped in to reassure depositors that ICICI Bank was financially sound amid reports of a wave of cash withdrawals from the bank. And Russia provided a further US $50bn to increase liquidity in its banking system. This comes on top of a US $130bn package doled out to Russian banks in the form of loans, tax cuts and delayed tax payments.

Bailout shattered, House rejects US financial-rescue plan

The US House on Monday, September 29, voted down the Bush administration`s historic USD 700 billion financial bailout plan, that led to one of the worst days for stocks. This is a sharp blow to all-party efforts, despite repeated warnings about the U.S. heading towards a long-term economic slowdown.

Treasury Secretary Henry Paulson warned on that stressed world markets would reduce credit availability threatening American jobs and livelihood.

Meanwhile, officials are trying to figure out what the next step will be for rescue-related legislation, and an aide in the House speaker`s office said lawmakers are ready to work in a bipartisan way.

U.S. stocks plunged after the news was broken. Dow Jones Industrial Average ended down 777 points, or 7%, to 10,365.

Major Asian indices also reacted to the bailout failure. Japan, South Korea and Australia markets plummeted in early trading on Tuesday.

A day to remember/forget ?

The failure of the bailout package in Congress literally dropped jaws on Wall Street and triggered a historic selloff—including a terrifying decline of nearly 500 points in mere minutes as the vote took place, the closest thing to panic the stock market has seen in years.

The Dow Jones industrial average lost 777 points on Monday, its biggest single-day fall ever, easily beating the 684 points it lost on the first day of trading after the Sept. 11, 2001, terrorist attacks.

As uncertainty gripped investors, the credit markets, which provide the day-to-day lending that powers business in the United States, froze up even further.

At the New York Stock Exchange, traders watched with faces tense and mouths agape as TV screens showed the House vote rejecting the Bush administration's $700 billion plan to buy up bad debt and shore up the financial industry.

Activity on the trading floor became frenetic as the "sell" orders blew in. The selling was so intense that just 162 stocks on the Big Board rose, while 3,073 dropped.

The Dow Jones Wilshire 5000 Composite Index recorded a paper loss of $1 trillion across the market for the day, a first.

The Dow industrials, which were down 210 points at 1:30 p.m. EDT, nose-dived as traders on Wall Street and investors across the country saw "no" votes piling up on live TV feeds of the House vote.

By 1:42 pm, the decline was 292 points. Then the bottom fell out. Within five minutes, the index was down about 700 points as it became clear the bill was doomed.

"How could this have happened? Is there such a disconnect on Capitol Hill? This becomes a problem because Wall Street is very uncomfortable with uncertainty," said Gordon Charlop, managing director with Rosenblatt Securities.

"The bailout not going through sends a signal that Congress isn't willing to do their part," he added.

While investors didn't believe that the plan was a cure-all and it could take months for its effects to be felt, most market watchers believed it was at least a start toward setting the economy right and unlocking credit.

"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."

Before trading even began came word that Wachovia Corp., one of the biggest banks to struggle from rising mortgage losses, was being rescued in a buyout by Citigroup Inc.

That followed the recent forced sale of Merrill Lynch & Co. and the failure of three other huge banking companies — Bear Stearns Cos., Washington Mutual Inc. and Lehman Brothers Holdings Inc., all of them felled by bad mortgage investments.

And it raised the question: Which banks are next, and how many? The Federal Deposit Insurance Corp. lists more than 110 banks in trouble in the second quarter, and the number has probably grown since.

Wall Street is contending with all of it against the backdrop of a credit market — where bonds and loans are bought and sold — that is barely functioning because of fears that anyone lending money will never be paid back.

More evidence could be found Monday in the Treasury's three-month bill, where investors were stashing money, willing to accept the tiniest of returns simply to be sure that their principal would survive. The yield on the three-month bill was 0.15 percent, down from 0.87 percent and approaching zero, a level reached last week when fear was also running high.

Analysts said the government needs to find a way to help restore confidence in the markets.

"It's probably fair to say that we are not going to see any significant stability in the credit markets or the stock market until we see some sort of rescue package passed," said Fred Dickson, director of retail research for D.A. Davidson & Co.

The bailout bill failed 228-205 in the House, and Democratic leaders said the House would reconvene Thursday in hopes of a quick vote on a revised bill.

"We need to put something back together that works," Treasury Secretary Henry Paulson said. "We need it as soon as possible."

The Dow fell 777.68 points, just shy of 7 percent, to 10,365.45, its lowest close in nearly three years. The decline also surpasses the record for the biggest decline during a trading day — 721.56 at one point on Sept. 17, 2001, when the market reopened after 9/11.

In percentage terms, it was only the 17th-biggest decline for the Dow, far less severe than the 20-plus-percent drops seen on Black Monday in 1987 and before the Great Depression.

Broader stock indicators also plummeted. The Standard & Poor's 500 index declined 106.62, or nearly 9 percent, to 1,106.39. It was the S&P's largest-ever point drop and its biggest percentage loss since the week after the October 1987 crash.

The Nasdaq composite index fell 199.61, more than 9 percent, to 1,983.73, its third-worst percentage decline. The Russell 2000 index of smaller companies fell 47.07, or 6.7 percent, to 657.72.

A huge drop in oil prices was another sign of the economic chaos that investors fear. Light, sweet crude fell $10.52 to settle at $96.36 on the New York Mercantile Exchange as investors feared energy demand would continue to slide amid further economic weakness. And gold, where investors flock when they need a relatively secure investment, rose $23.20 to $911.70 on the Nymex.

Marc Pado, U.S. market strategist at Cantor Fitzgerald, said investors are worried about the spread of troubles beyond banks in the U.S. to Europe and other markets.

"Things are dying and breaking apart," he said.

The federal Office of Thrift Supervision, one of the government's banking regulators, indicated that the market was overreacting to the House vote and that its fears about the financial system are misplaced.

"There is an irrational financial panic taking place today, and we support and applaud the continuing efforts of Secretary Paulson and congressional leadership to restore liquidity and public confidence," John Reich, Director of the federal Office of Thrift Supervision, said in a statement.

The plan would have placed caps on pay packages of top executives that accepted help from the government, and included assurances the government would ultimately be reimbursed by the companies for any losses.

The Treasury would have been permitted to spend $250 billion to buy banks' risky assets, giving them a much-needed cash infusion. There also would be another $100 billion for use at the president's discretion and a final $350 billion if Congress signs off.

But Wall Street found further reason for worry overseas. Three European governments agreed to a $16.4 billion bailout for Fortis NV, Belgium's largest retail bank, and the British government said it was nationalizing mortgage lender Bradford & Bingley, which has a $91 billion mortgage and loan portfolio. It was the latest sign that the credit crisis has spread beyond the US.