The House rejected the Wall Street bailout bill and the market screamed, selling off frantically until the Dow was left with its biggest one-day point drop ever.
"This is panic and ... fear run amok," Zachary Karabell, president of River Twice Research told CNBC. "Right now we are in a classic moment of a financial meltdown," he said.
"The mood is definitely the old expression, 'Fish or cut bait," said Matt Cheslock, a senior specialist at Cohen Specialists. "Everyone’s kind of upset with the political grandstanding that’s going on. We haven't solved any problems that we're in," he said.
The bill initially failed to get enough votes, sending the market into a tailspin, as congressmen and women huddled to try to shore up the votes to save it. To no avail: The bill was ultimately rejected, leaving the future of the bailout in question.
The Dow Jones Industrial Average ended down 7 percent, or 777.68 — its biggest one-day point drop in history — at 10365.45. The S&P 500 also logged its biggest one-day point drop, falling 106.59, or 8.8 percent, to 1106.42. The Nasdaq had its biggest one-day point decline since 2000, falling 199.61, or 9.1 percent, to 1983.73. The CBOE Volatility Index, widely viewed as the best gauge of fear in the market, surged 33 percent to a record 46.72. The VIX hasn't been above 40 in more than 10 years.
"The credit crisis has created a level of fear unseen since the 1987 stock market crash," Joe Kinahan, chief derivatives strategist at online brokerage thinkorswim Group, told Reuters.
Volume was light, with 1.16 billion shares changing hands on the NYSE, amid a lack of a buy side. That left the Dow swinging 100 to 200 points — sometimes in a matter of seconds.
The Dow dropped more than 700 points when the House rejected the bill, then pared that back to about 500, before swinging to a 600-point decline as the closing bell was ringing. Still swinging in those final minutes after the bell, the Dow settled down nearly 800 points.
That quick 200-point paring in the Dow's loss earlier was likely due to the fact that the market was expecting another vote, Pimco fund manager Bill Gross told CNBC.
(Click on the video at left to watch the CNBC interview with Bill Gross.)
But lawmakers said there wouldn't be another vote today.
“I honestly don’t even know where we go from here,” said Dave Rovelli, managing director of equity trading at Canaccord Adams. “It’s impossible to quantify.”
“We were all in shock,” Rovelli said of the mood on the trading floor. “The problem is, out in the boondocks, people don’t realize what this means. When they can’t get a loan at the bank, then they’ll figure it out.”
"If there is no package, there will be a tremendous hole in credit markets. This must be passed," Gross said.
"We don't have a backup plan," Rovelli added.
"You hate to say it but 10000 seems like a nice, round number that we may need to get to before we get people actually willing to buy some stocks," Cheslock said.
All 30 Dow components finished lower. Among the top drags on the Dow: American Express shed 13 percent, Bank of America lost 12 percent and Intel skidded 10 percent as investors worried that the global slowdown will drag down tech spending.
The energy components, Chevron and ExxonMobil , dropped at least 7 percent as oil fell below $100 a barrel.
Investors took some encouragement — though quickly forgot about it — from news that there was a resolution on another troubled bank, Wachovia, that wasn't a federal bailout.
Citigroup is buying Wachovia's banking operationsin a deal facilitated by the FDIC,after engaging in a brief bidding war with Wells Fargo.
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Wachovia shares plunged more than 80 percentto below $2; the stock didn't open until the afternoon and was only trading for about 1 1/2 hours. Citigroup shares fell 12 percent.
Investors hammered shares of other banks, wondering which one might be next to fall. Among the biggest decliners were Sovereign Bancorp , which fell 72 percent, National City , which lost 57 percent, and Fifth Third , which shed 44 percent.
"There are a number of regional banks which may need help, either because of the weakening mortgage market or simply because of the weakening economy," Michael Sheldon, chief market strategist at RDM Financial Group, told Reuters.
Morgan Stanley shares fell nearly 15 percent following news that Japan's biggest bank, Mitsubishi UFJ Financial Group, will take a 21 percent stakein the Wall Street firm.
Goldman Sachs lost 13 percent.
Meanwhile, Lehman Brothers sold its prized money-management unit, Neuberger Berman, to private-equity firms Bain Capital and Hellman & Friedman for $2.15 billion — a lot less than original estimates.
The Federal Reserve and other central banks announced an extraordinary move Monday morning — a massive liquidity injection— to try to revive paralyzed credit markets.
The Fed said it would inject another $330 billion of liquidity into the market. When combined with efforts of other central banks, that means an additional $630 billion of liquidity will be flowing through the market over the next several months.
As the U.S. government worked overtime to shore up its financial system, cracks started to show in the world financial sector as two European banks were nationalized over the weekend.
In the biggest European bank bailout since the credit crisis began, three governments jumped in to rescue Belgian-Dutch bank Fortis. The Belgian, Dutch and Luxembourg governments took a 49 percent stake in Fortis with an 11.2 billion euro ($16.4 billion) injection.
Meanwhile, the U.K. nationalized troubled mortgage lender Bradford & Bingley. After weekend talks failed to yield a buyer, the U.K. Treasury said it would take over B&B's 50-billion pound ($90.12 billion) mortgage portfolio and sell its deposits and branches to Spanish bank Santander.
Shares in French bank Dexia tumbled more than 20 percent on a newspaper report that it might launch an emergency capital increase.
Outside of the financial sector, technology stocks were the hardest hit as investors worried that a severe downturn in the global economy would drag down tech spending.
Apple, the most actively traded stock on the Nasdaq, fell 18 percent in its worst day since 2002 after several downgrades. Analysts said it wasn't so much that Apple was doing anything wrong as it was a worry about demand. There has also been criticism that Apple doesn't have an under-$1,000 computer in its lineup, something that would help soften the blow as consumers cut back spending.
The latest evidence of that came today, when the Commerce Department reported that consumer spending was unchanged in August, even as income rose 0.5 percent.
Shares of Apple rival Research In Motion fell 13 percent.
Shares of Google fell 12 percent to a nearly two-year low.
Microsoft , Cisco , Oracle , Dell and Yahoo all lost more than 9 percent.
Circuit City shares tumbled 21 percent after the electronics retailer reported a wider quarterly loss and withdrew its financial outlook. The company, which last week announced the immediate departure of its chairman and CEO, also said it would suspend new store openings beginning in fiscal 2010 in order to focus on turning around the business. Circuit City has reported losses for five of the past six quarters.
Shares of rival Best Buy fell 6.5 percent.
Shares of Pilgrim's Pride slipped another 21 percent after plunging 72 percent last week. The stock fell on warnings that earnings would take a hit because of restricted access to credit, a forecast seen as indicative of problems in the industry itself.
Pilgrim's Pride said it received a temporary waiver on a credit covenant and retained advisers to review its operations and refinancing strategy. The waiver will help provide liquidity.
TUESDAY: Case-Shiller home-price index; Chicago PMI; consumer confidence; Fed's Lockhart speaks; Rosh Hashanah (Jewish new year) holiday
WEDNESDAY: Auto sales; weekly mortgage applications; ADP employment report; ISM manufacturing index; construction spending; weekly crude inventories; Eid (Muslim) holiday
THURSDAY: Short-selling ban expires at 11:59 pm ET; ECB announcement; jobless claims; factory orders; natural-gas inventories; Fed's Bullard speaks; earnings from Constellation Brands
FRIDAY: August jobs report; ISM services index; earnings from Family Dollar
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